ChartOfTheDay-China

Back in January 1994, the North American Free Trade Agreement (NAFTA) was implemented and China devalued its currency to above eight yuan to the dollar. Today?s chart illustrates how these two events have altered the US economic landscape. Since January 1994, Canadian imports have more than doubled whereas Mexican imports have more than tripled while Japan stayed flat. Then there is today's big story that China devalued the yuan by 2.1% versus the dollar and will now peg its currency to a basket of currencies. However, with some claiming that the yuan is currently undervalued by as much as 60%, China has a long way to go before its currency (which has helped it increase exports to the US by more than 5 times since January 1994) is brought back in line with the dollar. While the yuan is still pegged, this move does suggest that China may be inclined to have their currency move in the direction of fair value. How quickly and to what degree is anyone's guess. Nonetheless, it is an important development as an ongoing revaluation of the yuan has the potential to place upward pressure on US inflation, interest rates, and jobs.