The latest headline or “headwind” for global capital markets has been news of China devaluing their currency (the yuan). This took the market by surprise, but shouldn’t have. Other large economies around the world have been indirectly doing the same thing for years (through various Quantitative Easing programs). For instance, the euro and the yen have declined by over 20% vs. the U.S. dollar since last May. This has made exports from Eurozone countries and Japan more competitive than the U.S. and China (as the yuan is pegged to the USD). In essence, a weaker currency helps a country take exporting market share from countries with a stronger currency. China, being an export-led economy, has had enough of this and is now the newest entrant in the “Currency War”. China’s move calls into question their economic growth, which is a large contributor to overall global growth.
In isolation, devaluing one’s currency can make exports more competitive and help stimulate the local economy. However, this doesn’t work if other trading partners are doing the same thing. Multiple large economies entering into a competitive devaluation would likely yield no clear winner and only lead to increased foreign exchange volatility and damaged international trade relations.
Currently, the U.S. dollar is the only major currency strengthening and is expected to remain strong vs. other currencies. This is hurting U.S. exports and profits of companies who earn revenue overseas. The Federal Reserve has made recent comments about their concerns of a strong dollar hurting the U.S. economy. It will be interesting to see if China’s currency devaluation will push out the Fed’s first expected interest rate hike.
What happens in China also has important implications for Oregon’s economy. In fact, there are two negative currents from China that could be headed our way. First, merchandise exports make up roughly 10% of Oregon’s economy. So, as mentioned above, a stronger dollar makes our products more expensive in countries with declining currencies and hurts Oregon’s exporters. Second and more importantly, China is Oregon’s largest export market at approximately 20% of total exports. Therefore, a sharp slowdown in China’s economy would likely hurt demand for our products.
While this news caused risk assets to sell off and volatility to pick up, it is too early to tell if this is short-term noise or if it signals the beginning of a global economic slowdown. As always, we will continue to watch our time-tested indicators that take emotional decisions out of the equation and will adjust portfolios as warranted.
Founded in 1981, The Partners Group has been serving the financial and insurance needs of employers, medical professionals, and successful individuals for over 30 years. We are an independent consulting firm with services including employee benefits, business consulting, retirement planning and investment services, commercial and individual insurance. The Partners Group has offices in Bellevue, WA; Portland, OR; Lake Oswego, OR; Bend, OR; and Bozeman, MT. For more information, please visit https://www.thepartnersgroup.com. 800-722-6339.
Sources: Currency figures-The St. Louis Federal Reserve. Oregon figures-The Bureau of Economic Analysis and the International Trade Administration.
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