Panic over

Capitalism lures, okay?
Thursday's pop quiz: Who said "Trust the market, respect the market, fear the market, and follow the market"? Donald Trump? George Bush? Nope, Zhang Xiaohui, the assistant governor of the People's Bank of China. It was an extraordinary comment from one who, until two days ago, had dictated the yuan exchange rate.

Since time immemorial the PBOC has fixed the value of the renminbi in US dollar terms. Until ten years ago that meant an unchanging exchange rate of about 8.27. In 2005 the PBOC revalued the yuan by 2% and allowed it to strengthen progressively over the next three years to 6.83, where it remained until 2010. Since then its value has been set on a daily basis by the PBOC, remaining mostly within a ±3% band centred on 6.25 per dollar. 

Until this week the daily reference rate was decided secretly in smoke-filled rooms by Mr Zhang and his colleagues. On Tuesday they altered the system so that the daily reference rate depends on the previous day's closing price and market forces (the PBOC remains the final arbiter). As has been the case for a while, the currency can move no further than 2% from the reference rate.

Cause for concern?
On the first two days under the new system the yuan weakened and investors feared the PBOC was embarking on a dangerous course of competitive devaluation. Emerging-market and commodity-related currencies took a beating. When the yuan weakened for a third time this morning investors were considerably more relaxed.

For donkeys' years the US Treasury and the International Monetary Fund have been pushing China to allow its currency to float freely. The new system is a step closer to that objective yet still allows the central bank to step in when the market is "distorted". That at least was the gist of Mr Zhang at his rare press conference this morning.

After their initial panic, investors have been persuaded that the PBOC's intention are honest. Assuming the bank does what it promises, this week's brouhaha should have been forgotten in a month's time.

And… breathe out
Having been walloped for the previous two days the Australian dollar leads the field this morning with the Kiwi close behind and the other commodity-oriented and emerging-market currencies all stronger on the day. That should mean a return to business as usual.

For today, "usual" means following developments in Athens and Berlin and keeping an eye on the US retail sales data. The Greek parliament is due to vote on the conditions attached to Bailout III and politicians in Germany are asking themselves whether they want to run with the new package or not. US retail sales are expected to have risen by a monthly 0.5%.

Other numbers today cover Spanish and Swedish inflation, US jobless claims, second-quarter economic growth in Greece and, tonight, NZ retail sales. And with those out of the way investors can start worrying about tomorrow's euro zone GDP figures.