The People's Bank of China’s decision to devalue the yuan may postpone the interest rate hikes by the Federal Reserve. As a result, the dollar dropped to the lowest level in two weeks. The zloty gained against all its major pairs.
The People's Bank of China unexpectedly devalued the yuan. As a result, the Chinese currency declined 1.9 percent against the dollar. The decision was caused by the report that showed an 8.3 percent decline in exports in June. However, a wider look at the Chinese economy shows a variety of problems with the stock market slide and deterioration in the housing market.
Nevertheless, the Chinese authorities said the decision will help to make the yuan a more marketable currency in an effort to internationalize it. What is sure, the move will weight on the Federal Reserve.
Given the expectations that the Fed will increase rates this year, the dollar exchange rate and its influence on the international trade is a significant factor to watch. The yuan devaluation may result in stronger imports and wider deficit (it stood at 43.8 billion dollars in June against 40.9 in the prior month). As a result, the GDP growth may decelerate and the inflation rate will slow its move to the Fed's goal. Thus, the Chinese monetary authorities move will lower the probability of interest rate hikes in the US.
The dollar's decline on Tuesday showed that similar feelings were prevailing. The EUR/USD increased to the highest level since 28 July.
Greece finally reached a deal with the international institutions on the bailout program. According to the Greek politicians there are only minor issues to be resolved. However, detailed information was not published. Athens will receive 86 billion euros of support within three years. Now the Eurogroup and some national parliaments have to decide on the issue.
All in all, the Greek government will receive the money needed to pay the European Central Bank bill. The nation has to repay 3.2 billion euros on 20 August.
This factor supported the euro. The common currency extended gains against the franc. The EUR/CHF increased to the highest level since 15 January - the day when the SNB decided to drop the currency peg. The weakness of the Swiss currency is stemming from the fact that the risk of the eurozone disintegration has been significantly reduced.
Nevertheless, the news concerning Athens did not reduce the negative impact of China's decision in the stock market. The red colour prevailed in the US and the European markets.
The zloty gained in the second part of the day. The Polish currency increased against all its major pairs. The zloty's move against the euro was limited, but the EUR/PLN dropped below the 4.20 zloty level.
Currently, the major factor for the Polish currency is the expectation for the Federal Reserve to increase interest rates. As the probability that the move will be deferred has increased, the zloty has been supported. Moreover, the Polish currency was helped by the news coming from Greece. As a result, the Polish currency may extend its recent gains.