News Note: Chinese Move to Devalue the Yuan, Then Do it Again

Anyone who has read the book Currency Wars by Jim Rickards knows that we just got some more missiles fired in the war by China. Reuters even uses the term currency war in their headline for this article on the news. First we will link to a few news articles on this below and then ask what this might mean in a brief analysis of this news.

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The Guardian - China Stuns Financial Markets

"China stunned the world’s financial markets on Wednesday by devaluing the yuan for the second consecutive day, triggering fears the world’s second largest economy is in worse shape than investors believed."

CNBC - How to Anger Asia, Fed in One Shot

"A new Asian currency war and a delayed Federal Reserve rate hike; these are the potential market-shaking implications of Beijing's decision to devalue the yuan, strategists told CNBC."

CNN - Yuan Tumbles for Second Day as China Devalues

"The PBOC, in a statement issued Wednesday, said it would work to keep the exchange rate "basically stable" and that there was "no basis" to believe the yuan would "persistently depreciate."

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Now some early reaction to the news:

Jim Rickards on his Twitter feed  and  his interview on Fox Business

"Pushing the #SDR decision back nine months was playing rough with China, so they decided to play rough with us. All's fair."

Willem Middelkoop on his Twitter feed

"Chinese 'double hit' in current Currency wars will turn out to be game changer for precious metals, again proven to be monetary safe havens."

Bill Holter gives his take on it

"The shot just heard ’round he world (for those with ears to listen) was a surprise 2% devaluation by the Chinese of their currency the yuan.  I have spoken to many whom I respect to hear their opinions and theories.  This is a very important move by China and one which will affect the entire financial world."

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My added comments:

When surprise moves like this happen you always have to wonder what prompted the move. It's obvious this is important news. But why did China make this move?

Is it because the US/IMF announced a delay on inclusion of the yuan into the SDR currency basket as Jim Rickards suggests?  Will this eventually lead to a higher profile for the SDR?

Is it because China is becoming frustrated with all the delays at the IMF that were supposed to increase its influence there such as the 2010 governance reforms?

Is it because China's economy is starting to spiral downward and this is a panic move to try and head off an economic slow down over there?

All we can do is guess because China tends to play things close to the vest and is not likely to disclose all the reasons for the move. It matters to us because sudden currency moves like this can always shake up markets and who knows what derivatives might be impacted by sudden currency moves. It seems likely this is just another move in the global chess match, but all the possible consequences are unknown right now.

Added note: KWN runs this summary from Art Cashin that talks about the move by China. It takes the position that most are misreading China on this. I can add this does agree with other sources that I know of that are knowledgeable on this issue.