Are currency devaluations imminent?

 

February 25, 2016

Pat Heller

 

 

 

Eight days ago, the New York Federal Reserve warned that asset managers are vulnerable to runs on their funds that could cause “significant negative spillovers” across financial markets. The prime minister of Japan, president of the European Central Bank, and the January meeting transcript of the Federal Open Market Committee all recently alluded to global economic weakness. These are some of the reasons for the significant decline in worldwide stock prices so far this year.

Because of this, Michael Hartnett, who is the Bank of America Merrill Lynch Global Research Managing Director and Chief Investment Officer, anticipates that there will be major development at the Group of 20 meeting of finance ministers and central bank governors going on this weekend in Shanghai, China.

He wrote, “We remain sellers into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response (such as a Shanghai Accord) begins to reverse the deterioration in global profit expectations and credit conditions.”

Perhaps the most likely outcome of this G-20 meeting in China will be a major devaluation of the Chinese yuan currency. This step should halt the uncertainty about the medium-term value of the yuan and resume expansion of its use in international transactions.

This possible devaluation could be the first round of a series of devaluations and expansion of negative interest rates announced at the European Central Bank Monetary Policy Meeting on March 10, the Federal Open Market Committee meeting March 15-16, and the joint International Monetary Fund and World Bank meeting in mid-April.

If the Chinese cut the value of their currency, that will temporarily boost the US dollar. But that will not last long. There will be growing pressure on the US dollar, the euro, and other currencies to also devalue. You may have little time to acquire your insurance position of physical gold and silver at today’s bargain prices.

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