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Competitive devaluation

Competitive devaluation

Surprise moves from the Reserve Bank of New Zealand and the Reserve Bank of India yesterday have intensified the market focus on currency levels. After the People’s Bank of China allowed the Yuan to depreciate on Monday, overnight the US president called on the Federal Reserve to cut rates “bigger and faster”. These actions indicate the new front in international competition is foreign exchange markets.

Whether it’s called “currency wars” or “competitive devaluation”, not all nations can win. The smaller central bank borrowings and balance sheets across the Asia Pacific area (ex-Japan) suggest there is more scope to compete if needed. However, as the trade dispute demonstrates, political considerations can trump straightforward economic imperatives for lengthy periods. This means forex market volatility could soon increase dramatically from current historic lows.

Stock and commodity markets stabilised overnight, with a few key exceptions. Oil prices plummeted 4.5% after the US Department of Energy reported an unexpected 2.4 million weekly build in crude stockpiles. Gold traded to six-year highs above US $1,500 an ounce. Overall sentiment was modestly pro-growth, lifting European shares, sparking an inter-session bounce in US equities, and pushing bond yields higher.

Asia Pacific shares are set for a mixed start, as futures traders pushed the Nikkei higher, left the Hang Seng flat, and the ASX200 lower.

The Australian company reporting season is in full swing. The situation at Australia’s former biggest wealth manager remains highly concerning. AMP revealed a $2.3 billion loss a 38% drop in operating profit and a $650 million capital raising. The shares are in trading halt as the capital raising proceeds, but there is a stronger probability of a new share price low when they re-commence.

Profits were generally down. Property group Mirvac saw a 6% drop and IAG’s insurance profit fell 15%. IAG’s sale of a Thai business bolstered its headline number. AGL provided a cautious outlook, but provided a reporting bright spot with a 2.2% lift in underlying profit and a $650 million buyback.

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