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China at the Epicenter

News and the market reaction to China’s surprise Yuan devaluation set the tone of the week as concerns about the health of the global economy mount. This action threatens to be the spark that catalyzes the next round of the global currency war as countries attempt to stay competitive in an environment of slowing trade.

Weekly Review

The Yuan dominated the newswires last week as the move by Chinese policymakers to devalue the local currency sent markets into a veritable frenzy. A recent stretch of bad economic data including disappointing export numbers and slowing investment contributed to the latest policy shift. Higher than anticipated food inflation is preventing the People’s Bank of China from adding monetary stimulus in the form of further interest rate cuts or slashing reserve ratio requirements. This is not currently feasible considering the potential contribution to higher prices. The move prompted retaliatory calls from both the European Central Bank and Bank of Japan as the Central Banks remain intent on keeping their own devaluation plans intact. This is expected to lead to increased asset purchases from the ECB, especially considering the downtick in inflation which saw monthly consumer price measures in deflationary territory while GDP growth remains elusive. Commodity prices fell broadly, led by the precipitous drop in crude oil while gold and precious metals managed to outperform the asset class on the back of a softer US dollar.

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The Week Ahead

The coming sessions will not be as a full of economic data as prior periods, owing to the relatively quiet calendar week. However, Wednesday is the week’s main event with the FOMC set to release the Meeting Minutes from the July meeting of the voting board. Markets will carefully be scanning the minutes for clues about the path of interest rates especially with the deteriorating external picture and difficulty the Federal Reserve is experiencing accomplishing its inflation goals. Aside from the important FOMC release, the Reserve Bank of Australia is set to publish its own monetary policy meeting minutes. US housing data will play a prominent role in the upcoming sessions with imminent numbers concerning building permits, housing starts, and existing home sales. Data is projected to be mixed according to the latest estimates. Aside from US centric data, the UK will be distributing data on inflation and retail sales. China will be revealing the latest annualized home price index, with numbers expected to show prices cooling owing to the slowing momentum of the broader economy.

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