The sudden decision by China’s PBOC to allow market forces to play a greater role in determining the yuan’s trading level surprised many this week.
Besides rattling financial markets, the move may have inadvertently sown the seeds for a lower Australian dollar and interest rates and, potentially, a rush of Chinese investors into Australia’s residential housing market.
That’s the view presented by Credit Suisse in a research report released yesterday, with the bank suggesting further yuan weakness may have longer-term implications for Australia’s economy.
Here’s the bank on why the devaluation of the yuan may heap pressure on the Australian dollar.
“We expect the AUD/USD to depreciate further as the lead indicators of growth in China remain subdued and commodity prices remain under pressure. Potentially, weakness in the AUD trade-weighted index will be diluted by other emerging Asian countries devaluing their currencies against the USD, reducing the effective weight of the USD in the index”.
Credit Suisse now believe the Australian dollar will fall to 0.6800 against the US dollar in the year ahead, down from 0.7000 seen previously.
Despite expectations of further declines in the Aussie, something many believe would ease pressure on the RBA to lower interest rates further, Credit Suisse suggests further commodity price weakness will add pressure on the RBA to cut the cash rate below the current record-low of 2%.
“For some time, the RBA has suggested that it was targeting a lower currency via lower rates. But recently, the RBA has taken a softer stance on the AUD, noting that the desired adjustment is taking place. However, further potential weakness in commodity prices and a weaker than currently forecast terms of trade (the RBA believes the terms of trade will remain flat for the foreseeable future), should mean further pressure for monetary easing”.
Credit Suisse suggest expectations for further yuan weakness may bring forward demand for Australian residential property from Chinese investors.
“Expectation of further RMB weakness could bring forward demand for Aussie housing as investors rush to get their currency out of the country before it is devalued further. However, the attractiveness of an Australian house for a Chinese buyer could potentially wane if the RMB weakens against the AUD”, they state.
That’s not an unrealistic view given many have expressed concern of increased capital outflows from China following recent weakness in the yuan.
Coupled with a weaker Australian dollar and potentially lower mortgage rates – scenarios Credit Suisse predict above – the rally in the hot housing markets of Sydney and Melbourne may not be finished with yet.