Countries heavily reliant on Chinese growth such as Australia and Japan will be hit the hardest but the U.S. is also not immune to problems in Asia. A large part of the reason why U.S. stocks opened lower for trading this morning is because of the weakness in Asian equities. Many U.S. companies are also reliant on demand from China and their earnings could be negatively affected by slowing Chinese growth. The decline in the value of the Yuan also reduces the purchasing power of the Chinese. Both AUD/USD and USD/JPY have been affected by the weakness in Chinese assets. The following chart of the Shanghai Composite Index (white line) and the Nikkei (green line) shows that oftentimes, the movements in Chinese equities lead the movements in Japanese stocks. Since USD/JPY has a strong correlation with the Nikkei, this suggests that Japanese assets are also poised for further losses if Chinese equities continue to move lower.
The Yuan could not be moving this aggressively without the ok from the central bank. The rapid turnaround in the currency pair suggests that the People's Bank of China is shifting away from a policy of Yuan appreciation. Their motivation is simple - to use the exchange rate as a means to provide support for the export sector and in turn the overall economy. This morning's Chinese trade numbers show the severity of the problems in exports. The Chinese trade balance plunged into a deficit in the month of February due to a surprise 18% yoy decline in exports (economists had been looking for a 7.5% rise). China has accepted that growth will slow this year but they want it to happen gradually. Since it is a busy week for Chinese data and a quiet week for U.S. data, we expect G10 currencies along with global equities to take their cue from the East.
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