Foreign Exchange Volatility

Driven largely by divergent policy trends, uneven global growth, persistent geopolitical risks and uncertainty in China, FX volatility has been amplified entering 2016. The long-awaited start to US monetary normalisation took place on December 16 as the US Federal Reserve raised rates by 25 basis points. The New Year started with fresh turmoil at the Shanghai Stock Exchange and unexpected weakness in the renminbi. These developments have led to speculation about the type of policy response Beijing will use and its implications for other countries. Clearly, a small devaluation in the Chinese currency versus the US dollar will not have any material impact on relative export competitiveness, nor a major influence on international currency dynamics. However, negative sentiment surrounding the Asian powerhouse, alongside ongoing international security issues, could fuel the spread of FX volatility and undermine commodities, making it more difficult for countries like Brazil and Russia to emerge from recession.

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