Here's why China could be about to unravel the post-Brexit calm

Photo by China Photos/Getty Images

Stocks have recovered strongly from the depths of the post-Brexit funk. The S&P 500 is back up near 2100, while in London the FTSE rallied so hard in the wake of expectations of more easing from the Bank of England that last night’s close of 6504 is the highest since 18 August 18 last year.

That high was just after the Chinese devalued its currency, a move that surprised traders and investors and sent global markets into a tailspin wiping more than 11% off the S&P 500 in a matter of days.

And it’s China again that Andrew Balls, managing director and chief investment officer of global fixed income at PIMCO, sees as the biggest risk to the current recovery in markets.

Balls highlights that as a result of the Brexit vote the fall in the British pound, Euro and other currencies has contributed to a stronger US dollar, which has also put upward pressure on the USD/CNY rate as the Chinese Yuan weakened.

That’s a risk for markets he says:

One key barometer to look at is the U.S. dollar. Since the G20 meeting in Shanghai we’ve had no surprises out of China, but a stronger dollar increases the risks of another devaluation of the yuan, which could trigger considerable volatility, much as it did at the beginning of the year and in August 2015.

Already the USD/CNY is at its highest level since 2010, which means the Chinese Yuan is at its lowest level since then. For the moment markets appear to be comfortable with that move and comments of support for markets from Chinese authorities.

But as Balls highlights further weakness in the Yuan could unsettle traders once again.

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