'Asian contagion' sends the Australian dollar hurtling to a 2-month low

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The Australian dollar was pummelled in overnight trade, falling to the lowest level seen since November 11 last year.

First, here’s the Australian dollar scoreboard as at 8.15am AEDT.

  • AUD/USD 0.7059 , -0.0098 , -1.37%
  • AUD/JPY 83.62 , -1.58 , -1.85%
  • AUD/CNY 4.6275 , -0.0402 , -0.86%
  • AUD/EUR 0.6543 , -0.0115 , -1.73%
  • AUD/GBP 0.4824 , -0.0051 , -1.05%
  • AUD/NZD 1.0634 , -0.0031 , -0.29%

According to Jason Wong, currency strategist at BNZ, a continued slide in the Chinese renminbi, concerns surrounding the health of the Chinese economy and renewed geopolitical tensions on the Korean peninsula all acted in tandem to drag the Australian dollar lower.

“Market sentiment turned down following China’s unexpectedly weaker currency fixing yesterday afternoon”, wrote Wong in his morning note.

“The PBOC set the Yuan reference rate at 6.5314, an effective 0.22% devaluation, following the 0.21% devaluation the previous day. This was the weakest back-to-back adjustment since the shock mid-August 2015 devaluation. The Yuan offshore-onshore gap widened to a record level (over 1600bps intra-day), suggesting that the market expects ongoing devaluations in the CNY reference rate going forward.”

“The market saw the PBoC’s move as an increasing tolerance of China’s government to use depreciation of its currency as a policy tool to support economic growth. The move triggered a downward movement in Asian currencies, with the NZD and AUD swept away for the ride.”

Despite mixed economic data from the US overnight – the ADP private sector payrolls report increased by a healthy 257,000 in December while the ISM non-manufacturing PMI missed expectations at 55.3 – the fallout from what Wong dubbed the “Asian contagion” ensured that the Aussie remained under pressure throughout the overnight session.

Looking ahead to Thursday’s session in Asia, the same factors that drove the price action yesterday are likely to remain in place.

While building approvals and international trade figures from Australia will be released at 11.30am AEDT, market sentiment, and as a consequence movements in the Aussie, will likely be driven by the performance of Chinese markets, particularly the renminbi.

Overnight the USD/CNY finished trade at 6.5554, weaker than the 6.5314 level the PBOC fixed it at on Wednesday morning. Based off market pricing, this suggests that there’s likely to be another weaker fix at 12.15pm AEDT today.

Markets are expecting this so there is a risk that a modest devaluation, or none at all, could spark a sharp knee-jerk reaction higher in the Aussie should it eventuate.

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