Greece finally clinched a third bailout from creditors when its parliament approved the deal and Germany backed off its opposition to the terms.
The deal isn't perfect and the International Monetary Fund is
refusing to participate until there is an agreement on debt relief from
Greece's Eurozone creditors.[2]
However, U.S. investors
greeted the news that Greece will remain in the monetary union with a sigh of
relief. Is the Greek drama finally over? Probably not for long.
China added significant uncertainty last week when the Chinese
government unexpectedly devalued the yuan against the dollar by the largest
amount in two decades. While China claims that the move isn't designed to lower
export prices and boost demand, the move came after a series of depressing
export reports that suggest China's economy is in trouble. At any rate, China
has been under immense pressure to devalue its currency as part of market
reforms. Investors are worried that a currency war could put pressure on the
dollar and hurt U.S. manufacturers.
Despite panicky media headlines that claimed that the sky is
falling, the devaluation really isn't a big deal. Here's why:
The Chinese yuan dropped about 3.5% against the dollar in the past
year. However, the Euro is down 16.4%, the Canadian dollar is down 15.8%, and
the Japanese yen is down 17.0%.[3]
All told, the U.S.
dollar has gained significant ground against the currencies of most of our
trading partners. A stronger U.S. dollar means that Americans can afford to buy
more foreign products. As First Trust's chief economist says, "The idea
that the Chinese devaluation is going to send ripples of catastrophe across the
world is nothing more than a Chicken Little story."[4]
A cheaper yuan is like a sale on Chinese goods. Right now, the Chinese
economy is showing weakness, and a cheaper currency will hopefully help stoke
growth in the world's second-largest economy. If the move is successful in
boosting growth, it will be a big help to the global economy. A more expensive
dollar relative to the yuan means that Chinese consumers might end up importing
fewer U.S. goods (potentially causing some U.S. firms to suffer in the short
term). However, if it's a sign that China may be allowing the market (instead
of its central bank) to set the value of its currency, it's a net win for
global consumers in the long term.
Looking at the week ahead, all eyes will be on China to see
whether last week's currency devaluation will continue. Analysts will also be
digging through the official minutes from the latest Federal Reserve Open
Market Committee meeting for more hints about how the Fed plans to handle
potential threats to economic growth.[6]
P.S.
You may have seen Chinese currency called the yuan or the renminbi in media
reports and wondered if there was a difference. They are essentially
interchangeable terms. Renminbi (meaning "people's currency" in
Mandarin) is the formal term used by Chinese officials, while the yuan is the
actual unit of the currency. http://campaign.r20.constantcontact.com/render?ca=6aeb8358-2879-4419-bf50-662d3bc54725&c=f16dc860-b8fc-11e3-bd5e-d4ae52806905&ch=f172aa60-b8fc-11e3-bd5e-d4ae52806905
Magellan Planning Group
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