Yuan devaluation dents US rate hike chorus
The G10 currencies were impacted positively as the US dollar index dropped in value in the two weeks ending August 21, 2015. Devaluation of the Chinese yuan on an immediate basis led to an appreciation in the US dollar against the yuan and other Asian currencies. A strengthening US dollar makes it difficult for the US Federal Reserve to thrust inflation upwards, as value of imports would decrease and US exports will be undermined. On that note, interest rate hikes could be less likely, since the event will extend the appreciation in the US dollar.
Currencies gain as US dollar index sinks
The above graph shows that the top five performers among the G10 currencies ended the two weeks between August 7 and August 21 on a positive note. These currencies include the Swedish krona, the euro, the Swiss franc, the Japanese yen, and the British pound, which all belong to the basket of currencies constituting the US dollar index.
The Canadian dollar, though being a part of the US dollar index, closed at a negative note after the yuan devaluation, as the economy is largely dependent on commodity exports, which have taken a hit following China’s imports becoming more expensive. The other commodity currency is the Australian dollar, which fell by 1.32%. The US dollar index was at the bottom of the ranks in the G10 with respect to the performance after the yuan devaluation.
Impact on the market
In terms of ETFs in the developed economies between August 7 and August 21, the iShares MSCI EAFE ETF (EFA) fell by 7.25%. The PowerShares DB US Dollar Bullish ETF (UUP) fell in the same period by 2.82%.
The American depository receipts (or ADRs) trading in the developed countries were moving in the negative zone. Banking ADRs like the Deutsche Bank AG (DB) fell by 12.02%, while Citigroup (C) ended at a -6.46% low. Australian banking ADR Westpac Banking Corporation (WBK) declined by 6.95%.