ANALYSIS: China Devalues The Yuan, Meaning More Bad News For Base Metals

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China devalued its tightly controlled currency on Tuesday, causing the currency’s biggest one-day loss in over two decades.

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This move is another indication of China’s growing worry about its slowing economy, at a time when other efforts to boost the economy haven’t been successful.

Yuan per Dollar (1 year out) - Source: Yahoo Finance

Yuan per dollar (one year out). Graph: MetalMiner analysis of Yahoo Finance data.

The currency not only had its biggest one-day loss, but it’s also breaking a three-year support level as we can see in the next graph. This has never, ever happened since the yuan started to appreciate back in 2005.

Yuan per Dollar breaking 3-year support

Yuan per dollar breaking three-year support. Graph: MetalMiner analysis of Yahoo Finance data.

A weaker currency makes imports more expensive and helps China’s exports. This year, trying to offset weak domestic demand, China already encouraged its refined commodities producers to increase exports.

What This Means For Domestic Producers

A weaker currency will likely help prop up exports of metals such as steel and aluminum products, potentially hurting prices around the globe. Moreover, a weaker currency will likely translate into weaker demand for internationally produced commodities.

American Iron and Steel Institute (AISI) President and CEO Thomas Gibson said the US government needed to intervene to fight what is sure to be a tide of Chinese imports due to the devalued currency.

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“Today’s action is further illustration of the Chinese government’s active role in manipulating the value of its currency to promote Chinese exports,” Gibson said. “China has consistently intervened directly in foreign exchange markets to control the value of the yuan versus the US dollar to make their exports more competitive and impose new barriers to imports. Our government must address the massive damage that China’s undervalued currency is causing to our nation’s manufacturing sector, especially the steel industry.”

Gibson also noted that the Treasury Department again, in its April report on exchange rate policies, confirmed that the yuan remains “significantly undervalued,” but did not officially declare China a currency manipulator at that time.

What This Means For Metal Buyers

We suspect that this will only add to the bearish momentum we are seeing in commodity markets, putting more pressure on industrial metal prices that can’t catch a break from falling markets.

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