Chinas depreciation reason to postpone Fed rate hikes?

A sack of rice falls over in China, and the global financial markets tremble. Of course, this is not just any old sack. The decision by the Chinese central bank, to allow market forces to play a greater role in determining its fixing rate of USD-CNY with immediate effect undoubtedly represents a historic breakthrough.

Commerzbank assumes, the market might indeed interpret developments in China as negative for the USD. For a marked economic slowdown in China would of course have important implications for global economic growth and the commodity markets. Therefore, the Fed might well regard this as posing a risk to growth and inflation in the USA, says Commerzban in a report on Thursday.

However, it is not more than a risk factor. The extent of the growth slowdown in China is not yet known, let alone the contagion effects for the US economy. And the recent measures taken by the PBoC are certainly also intended to support the economy and prevent a "hard landing". It may be somewhat premature to completely dismiss the prospect of an interest rate hike by the Fed in September, as the market did yesterday, adds Commerzbank.


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