Ilya Spivak, Currency Strategist, at DailyFX, comments:
“China has triggered another sharp burst of risk aversion after devaluing the Yuan by over 0.5 percent at today’s daily fix, marking the largest downward revision since Augusts’ fateful readjustment. The sentiment-linked Australian Dollar dropped alongside Asian share prices while the safety-linked Japanese Yen outperformed. Cycle-sensitive commodities including copper and crude oil fell while gold and silver traded higher. Chinese stocks were shut down for the day after hitting the limit-down threshold of 7 percent.
“The consensus interpretation for the markets’ negative response is that Chinese devaluation speaks to a need for emergency stimulus expansion, which implies greater-than-expected malaise in the world’s second-largest economy. Weakening the currency can be seen as a form monetary stimulus however, so one might have expected markets to cheer Beijing’s actions. With that in mind, it seems as though price action reflects a reflexive response drawing surface-level parallels with Augusts’ panic selling rather than a sober evaluation of China’s actions on their fundamental merits.
“Looking ahead, S&P 500 futures are pointing sharply lower, hinting that risk aversion is aiming to continue in the hours ahead. The economic calendar is relatively quiet, putting the spotlight on Fed-speak as the source of event risk du-jour. Comments from Richard Lacker and Charles Evans, Presidents of the Richmond and Chicago Fed branches respectively, are due to cross the wires.
“The two policymakers represent the hawkish and dovish extremes of last years’ contingent of FOMC voters. Traders will look to their remarks for clues about the likely 2016 rate hike path. The central bank projected four 25bps increases last month while the markets continue to envision no more than two. Investors’ dovish lean skews volatility risk to the upside for the US Dollar in the event that cumulative commentary strikes a hawkish tone.”