What to hear something ironic? My handsome 6’7 husband is afraid of heights.

It’s his birthday tomorrow and he said to me that he’d like to “conquer his fears” this year on his birthday by doing the CN Tower Edge Walk – which involves being strapped to a harness and walking around the circumference of the CN Tower - 1,168ft above the ground.

So, before he could change his mind, I booked the Edge Walk for us and we’re doing it tomorrow afternoon at 12:30pm – I’ll be sure to tell you all about it next week and provide photographic evidence of his accomplishment.

In the meantime, we have some interesting parallels to draw with China this week as the world watched the yuan devalue for three consecutive days (followed by a day of moderate strengthening today). The move to devalue the currency followed reports last weekend that China saw a sharp drop-off in exports last month, rocking investor sentiment and sending commodity prices and global equity markets lower.

So what exactly did China do this week with respect to its currency?
The People’s Bank of China (PBOC) devalued the country’s currency and announced a material change in how the exchange rate between its currency (the onshore yuan, CNY) and the U.S. dollar (USD) is determined. There were two actions taken on Tuesday August 11th. First, the PBOC set the ‘fixing’ (peg) at 6.2298 USD/CNY, which represented a 1.9% devaluation from the prior fixing of 6.1162 USD/CNY. This is hardly a dramatic move – but the second more significant step was that the PBOC announced a change to the fixing methodology for the CNY that is more market oriented. More is stressed as this is a step towards market pricing for the exchange rate but it is a far cry from a flexible exchange rate system. Longer term, we expect the managed on-shore currency (CNY) to converge with the market determined offshore rate (CNH). We would expect this convergence to take place over a period of time given it has many implications for financial markets, not to mention Chinese businesses.

Why all the fuss over a 2% depreciation?
If this weren’t China, it’s hard to believe that this move would have garnered the same level of attention. China’s economic might combined with its communist system of government seems to have created a large population of people that are perpetually skeptical of all things China. While the depreciation itself is modest, we think the more important (and positive) development is that the determination of the CNY fixing is more market based. We would argue a major element of the current hullabaloo over the modest depreciation of the CNY is that many analysts simply did not have such a move priced in to their forecasts despite evidence the CNY was (and remains) overvalued - kudus to RBC Capital Markets for forecasting the depreciation.

What are some potential reasons for this fear-conquering depreciation?
We believe there are 3 reasons that could potentially explain why the PBOC has gone down the path of a having a more market oriented approach to the CNY fixing:

1. CNY was overvalued, which hurts Chinese exporters from a competitive perspective
2. Ambitions to be in the IMF’s SDR basket (Chinese policy makers have made no secret of their ambitions to be included in the International Monetary Fund’s (IMF) ‘Special Drawing Rights’ (SDR) basket for a number of reasons that can chalked up to prestige and prudent economics.
3. Decoupling from the Federal Reserve before ‘Liftoff’ (i.e. decoupling the CNY from the U.S. dollar ahead of interest rate hikes by the Federal Reserve).

If these potential explanations are correct, then China (not to mention commodity prices and global equity markets) are experiencing some short-term pain in anticipation of some long-term gain – much like my husband’s current state of anxiety and second-thoughts about what we’re doing tomorrow.