Yuan Devaluation Shakes Up Currency, Commodities Markets

Earlier today, the People’s Bank of China lowered the yuan’s daily reference rate by 1.9% amid a slew of recent data showing decelerating growth for the world’s second biggest economy. The news shook up the commodities and foreign currency markets, but not enough to change the downside momentum that was created by yesterday’s new regarding the timing of the next Fed rate hike.

Yesterday, the U.S. Dollar sold off, triggering a rally by gold, the Euro and British Pound after Federal Reserve Vice Chairman Stanley Fisher told Bloomberg TV that he doesn’t expect the first rate hike by the U.S. central bank in more than nine years until after inflation returns closer to the Fed’s target of 2%. The inflation rate has dipped close to zero in recent months and hasn’t been above 2% since April 2012.

The EUR/USD traded higher on Tuesday despite Germany’s weak ZEW survey. The economic sentiment reading was down from the previous month and below expectations. In other news, Greece and its international lenders reached a new bailout deal. This lent support to the Athens stock market.

The British Pound rallied after the U.S. Dollar weakened. There were no major U.K. economic reports today, but on Wednesday, traders will get the opportunity to react to the latest U.K. labor figures. The Average Earnings Index is expected to show a reading of 2.8%. This is slightly below last month’s 3.2% reading. The Claimant Count Change is expected to be 1.4K. Down from the July reading of 7.0K. The unemployment rate is expected to remain unchanged at 5.6%.

The weaker dollar combined with technically oversold conditions triggered a strong rally by December Comex Gold futures. The current chart pattern and the upside momentum created by the weaker dollar could trigger a rally to at least $1140.50 before sellers step back in.

The uncertainty created by the Yuan devaluation has also raised the possibility of a currency war which is helping to encourage shorts to cover their gold positions and speculators to explore the long side of the market at least over the near-term.

Despite the weaker U.S. Dollar, September Crude Oil futures reached a new low for the year. The selling pressure was fueled by a report which showed Iran crude oil production for July was the highest level it’s been in at least two years, according to OPEC. The report also showed that Iran was among the 12 members contributing to overall gains in production in July.

In December, Iran produced just under 2.8 million barrels per day, down 20 percent from 2011 levels. The country reported to OPEC oil production for July at 3.13 million barrels per day. Before the economic sanctions, daily oil production by OPEC was about 3.6 million barrels per day.

Tomorrow’s U.S. Energy Information Administration’s inventories report is expected to show a 1.6 million barrel draw down.