Currency markets have been an absolute bore since February 2016, when the policy makers of the world’s main financial powers concluded the so-called ‘Shanghai Agreement’, intended to calm markets after the surprise yuan devaluation of August 2015. Since that agreement, the DXY US dollar index has moved within an extremely tight range around the 97 level. The low volatility helped financial markets to recover in 2016, since low volatility translates into lower risk premiums and higher asset prices. Monday’s decision of the Chinese authorities to let the yuan weaken past seven yuan to the dollar raises the question of whether the Shanghai Agreement is dead and the world in for a period of much higher currency volatility. President Trump’s reaction, labelling China a currency manipulator and demanding the Fed takes action to weaken the US dollar, would certainly seem to suggest this.
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