China’s surprise 1.9 percent devaluation of its currency yesterday is sure to affect treasury and finance professionals around the world.
Here are four takeaways:
- The move instantly makes Chinese exports much cheaper. Companies competing with Chinese counterparts should prepare for a hit to their sales.
- How the Fed will react is anyone’s guess. It could leave interest rates unchanged, or it could go ahead and raise them later this year as it has signaled for weeks. “The real storm will come when the Fed raises rates sucking capital out of China and other emerging markets. In other words, the real turbulence is yet to come,” wrote economist Christopher Balding.
- Emerging currencies and neighboring economies like Australia, Singapore and South Korea could really suffer. “Beggar Thy Neighbor,” tweeted Patrick Chovanec, an expert commentator on China’s economy. If the global economy further weakens as a result of the yuan devaluation, treasury and finance will be hard-pressed to justify capital expenditure and instead continue to hoard cash.
- The U.S.-China currency war is back. Prepare for more FX turbulence.