The Aussie dollar remains under pressure this morning as the fallout from the surprise Chinese RMB devaluation yesterday continues to rattle global markets.
Bank of New Zealand currency strategist Kymberly Martin wrote this morning:
“The move by the PBOC appears to have unsettled markets as they wonder; is the move part of a desperate attempt to revive China exports, as downside risks to the economy’s growth build; is there more to come; is there potential for the move to delay the US Fed from hiking rates?”
That’s meant, she said, there has been a “backdrop of heightened risk aversion, as equities and commodities fell, US and German bonds regained ‘safe haven’ status”.
It’s also meant the Aussie dollar has fallen further. So at 0.7299 this morning, the Aussie is currently 1.50% lower than where it was around this time yesterday.
Ray Attrill, the NAB’s co-head of global currency strategy, told Business Insider yesterday the initial move lower was “a classic example of the AUD being the most liquid proxy trade for USD/Asia”. That meant it was also in a “sense very much a knee jerk move”.
But overnight it became clear that many traders and investment banks think there is more to the move than the official statement that it is a move toward financial liberalisation.
Certainly also because the move to adjust the “onshore rate” saw a further 2.5% devalutaion in the unofficial “offshore rate” there are expectations of further weakness given Beijing said part of the move was to expose the RMB to market forces.
That’s kept the pressure on the Aussie dollar and it has put further downward pressure on commodity prices.
Bank of America analysts, in a note following yesterday’s devaluation, said “Our commodity team has estimated that a 1% move in CNY is associated with a 0.5-0.6% decline in USD commodity prices.”
Downward pressure on commodity prices, and expectations that we are about to see further deflationary forces released globally, further reinforces pressure on the Aussie dollar in most traders’ minds and thus in the market as well.
Chinese moves are no doubt aimed at propping up its faltering economy. That should be good for the Aussie dollar and Australian trade with China in the long run.
But in the meantime, the collateral damage from this move, and likely subsequent moves, is likely to keep emerging Asian currencies and the Aussie dollar under pressure.