Australian banks don't think China's currency depreciation will have a long-term impact on the Australian dollar


While the Australian dollar may have taken bath today on the unexpected depreciation in the Chinese yuan, Australia’s two largest banks believe the implications for the Aussie will be negligible over the medium to longer-term.

Richard Grace, chief currency and rates strategist and head of international economics at CBA, believes the one-off depreciation doesn’t change the speed or direction of their medium-term outlook for AUD/USD exchange rate.

He suggests a combination of lower global growth, weaker Australian terms of trade, narrowing interest rate differentials between the US and Australia, US dollar strength and continued pressure on Asian currencies will continue to weigh on the Aussie moving forward.

Sean Callow, senior FX strategist at Westpac, believes the move seen today suggests the Aussie should have been hit harder on the trade figures released over the weekend, rather than the announcement made by the PBOC today.

“The PBOC decision highlights just how weak China’s exports prospects must be, suggesting the AUD should have been punished yesterday, not waiting for China’s reaction to the trade data today”, said Callow.

Callow suggests the steps taken by the PBOC towards a more liberalised currency “is by no means bad news for the Australian dollar”, adding “it should make little difference to the volume of China’s demand for Australia’s key commodity exports, even though the CNY price will rise somewhat”.

In the near-term, both Grace and Callow expect the AUD/USD will struggle to move significantly lower from its present level.

Here’s Grace:

“AUD will remain under some downward pressure because of the USD bid in the market and because of the perception that China needs to further stimulate its economy. We don’t believe AUD/USD will decline much more than 2.0% on this particular development (to 0.7250)”.

And Callow:

“The PBOC decision is a setback for AUD/USD short term as it attempted to test 0.7450 resistance. But it most likely just pulls the pair back into the middle of the 0.7250-0.7450 range we have suggested for some time”.

The AUD/USD currently sits at .7330, down 1.08% for the session.

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