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Shifting expectations of global interest rates & the possibility of global currency wars: Is the inevitable being postponed?

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by Bhimavarapu V V Krishna
4 October 2015

This article aims to analyze the sudden swings in the global interest rates landscape – the unexpected devaluation of the Chinese Yuan – the biggest currency manipulation by the People’s Republic of China in over two decades & the decision of the US Fed to hold the interest rates as they are despite having a favorable economy. It further attempts to predict when could the US monetary tightening could begin and what could be happening with respect to the procurement costs globally.

Why did the Chinese central bank devalue the Yuan? What are its effects?

The Chinese central bank (PBOC) has surprised the global markets by announcing a change in the peg of the Chinese Yuan/Reminbi against the US Dollar by 3% in August. This sent shockwaves through the global financial markets. This move has been interpreted as a beginning of an inevitable and widely expected currency wars globally.

On the other side, the move only seems justified from the PBOC’s side; falling exports and troubled stock markets & flagged growth have been causing troubles to the world’s second largest economy. This move is expected to help it retain a good fraction of the capital that has been leaving China in the wake of speculations of the US Fed rate hiking cycle.

My expectation is that China will now be on the curve of a competitive devaluation where competitors of China are expected to take away its export shares and deflationary pressures. If they were to attempt this devaluation in the expectation of a better global exports share, they would not have settled for such small devaluation, it would have been bigger.

 

Author: Bhimavarapu V V Krishna

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