China's decision to delink its currency Yuan from the Dollar and changing reference rate has sent a rippling effects across commodities in emerging market currencies. The move by the People's Bank of China resulted in devaluation of Yuan against dollar by 1.9%. Bloomberg said this was the biggest one-day loss since China unified official and market exchange rates in 1994.
Mitul Kotecha, analyst with emerging markets research of Barclays said in a note that Chinese currency is now on a potentially weaker trajectory. Mitul noted, "The fixing will be much more dependent on the market and could move in a more volatile and potentially weaker trajectory than previously. Asian currencies set to stay under pressure."
However later in the day Greece and its creditors agreed on bailout deal of Euro 86 billion which strengthened euro and dollar index fell below 97 level resulting in strengthening in gold, crude oil etc. gold jumped from sub 1100 level to $1115 and crude oil also started moving up.
While in early trade gold and base metals were trading lower albeit marginally as sentiments turned bearish. India's rupee fell by 0.4%. However traders dealing with china were looking disturbed. They fear increasing dumping of commodities like paper, steel, chemicals and petrochemicals from China as lower currency incentivizes china's exports.
Janak Ladhani, Managing Director, Sonkamal Enterprise, importer of chemicals like phenol said, "importers were already facing huge pressure due to continued fall in chemicals and petrochemicals following sharp fall in crude oil prices in last two months. China's decision to delink Yuan and devalue it will increase pressure on commodities imported from there."
Many chemicals' prices have fallen and importers were stuck with high cost commodities which they are selling at losses and domestic manufacturers of these commodities are cutting capacity use as their business is becoming unviable.
Similar fears are among importers of steel who are eagerly awaiting government to increase import duty further.
Gnanasekar Thiagarajan, Research Director, Commtrendz, a risk management firm, said, "even exports of commodities like cotton, textiles etc could see increased competition from chinese exporters."
Commodities markets gave knee jerk reactions to the People's Bank of China announcement to cut its daily reference rate for the currency by a record 1.9 percent has. Immediately after the announcement US Dollar strengthened and metals, bullion and emerging market currencies started quoting lower. However Greece deal weakened the dollar and commodities reversed.
Ajay Kedia, director, Kedia Commodities said, "by delinking currency from dollar china has given a signal that they are in trouble and there was a need for measures to lift exports." So far china's economy was slowing but yesterday's trade data shown that China's imports and exports fell over 8%.
China was making efforts with International Monitory Fund to see that it accepts its currency for qualifying for forex reserves and hence China was keeping its currency stable. However IMF delayed the decision on the issue which prompted China to change policy on currency to incentivize exports.