While stocks are currently flirting with record highs, it was a much different story one year ago. On August 11, 2015, the S&P 500 opened sharply lower, as investors woke up to news that China devalued its renminbi currency by 2 percent against the dollar, sparking its largest one day drop in 11 years. This sent stocks into a tizzy, including Apple and Caterpillar , companies exposed to China’s economy. ‘The People’s Bank of China decided to implement a one-off devaluation of the renminbi in order to regain some of its control of monetary policy in an environment where the Federal Reserve was getting ready to hike rates [in September 2015], or at least so we thought,’ said Ian Gordon, an FX strategist with Bank of America Merrill Lynch, based in New York. The Fed ended up making its first rate hike since 2006 in December 2015, as volatile stock markets kept the Fed on the sidelines in September 2015. The S&P 500 fell 0.96 percent on August, 11 2015. ‘The market reaction was very surprised at this and it didn’t immediately understand what the ramifications were going to be,’ Gordon said. The stock market correction that ensued on August 24, 2015 was caused in part by uncertainty surrounding the renminbi. A weaker renminbi makes China’s exports more attractive. One year later, the renminbi has stabilized, although it still declined 4.7 percent against the dollar. A repeat of the events that took place one year ago are unlikely. ‘I think the Chinese authorities have started to do a better job communicating their intentions and the expectations on what the currency is going to be doing so that has helped stabilize investor sentiment,’ Gordon said. He also said the dollar has weakened so far this year, which has taken pressure off the PBOC from devaluing the currency more aggressively and allowed them to depreciate the currency in a more orderly fashion. The U.S. Dollar Index fell 3 percent year-to-date. ‘We actually see the renminbi continuing to weaken over the course of this year,’ Gordon said. Bank of America expects the dollar-renminbi exchange rate to rise to 7 by year’s end, up from its current level of 6.64 yuan, and remain there until mid-2017 before declining to 6.8 by the end of 2017. He said the PBOC doesn’t want to use lower interest rates to support weak economic growth, and instead prefers to use the currency to its advantage. China’s economy, the world’s second largest, grew 6.7 percent in the second quarter of 2016, a far cry from the double-digit growth seen back in 2010. ‘We think it’s time to short the renminbi,’ he said. ‘We prefer to do it against a basket of currencies rather than just against the dollar.’ TheStreet’s Scott Gamm reports from Wall Street.
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