Greek Deal “Agreed”, Yuan Tumbles on PBOC Reforms

It’s been a volatile start to the day already in the markets after the Yuan suffered its largest ever daily decline as the People’s Bank of China announced changes to the way it calculates the Yuan daily midpoint. Meanwhile a Greek official is claiming a deal has been reached with creditors, with only a few small details remaining to be ironed out.

The Chinese Yuan is on course for its largest every daily decline of around 2% after the PBOC reformed the way it calculates the Yuan midpoint. The midpoint will now be calculated based on market makers’ quotes and the previous day’s closing prices, which the central bank claimed will make the midpoint more market orientated. A number of other currencies tracked the moves in the Yuan including the Australian dollar, with the country having a large exposure to China’s economy.

The move by the PBOC appears to be a knee-jerk reaction to the poor trade data over the weekend. Exports fell by 8.3% in July and clearly that was the final straw for the central bank at a time when it has already had to ease monetary policy on numerous occasions and growth continues to threaten to fall below the 7% target. Devaluing the yen should support exporters at the expense of other exporting nations in the region so we can probably expect similar easing measures in the coming days.

The Yuan devaluation will now raise many questions about whether the Fed can still seriously consider raising rates this year. The process of competitive devaluation among numerous countries that are easing monetary policy is effectively exporting deflation to those that aren’t, particularly those contemplating rate hikes. Any move by the Federal Reserve to now raise rates could strengthen the currency by more than previously expected. Whether that will be enough to encourage the Fed to delay such a hike isn’t clear but if they were not sure before, this certainly won’t help matters.

Greece and its creditors appear to have taken another big step closer to agreeing on the terms of the country’s bailout of around €86 billion after a Greek official suggested that the budget surplus targets have now been agreed.

The Greek finance ministry official claimed that an agreement has been reached and all that is left are the minor details. Of course, we’ve heard this all before so shouldn’t get carried away until we’ve had official confirmation but it all sounds very promising.

It’s very unusual for talks between Greece and its creditors to go so smoothly which may straight away raise scepticism among some investors. If true, then Greek ministers could pass the bailout throughout parliament on Thursday leaving finance ministers to give it their backing on Friday, comfortably before the 20 August deadline when Greece must pay €3.2 billion to the European Central Bank.

It’s looking a little quiet on the data front again today, with German and eurozone ZEW economic sentiment figures the only notable releases. A small improvement is expected in the August readings with the boost possibly coming from reduced Grexit concerns which had built up substantially heading into last month.

For a look at all of today’s economic events, check out our economic calendar.

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