The Chinese yuan has had it’s biggest fall in three years recently in what appears to be a subtle shift in sentiment toward the Chinese economy from global investors.
Chinese shares, commodities and mining shares have also fallen recently.
The move of around 1% in the yuan is not large by any stretch of the imagination but it is enough to take pressure off the currency’s multi-year appreciation and allow the People’s Bank of China to encourage a bit more weakness and volatility.
The ANZ said in a note yesterday that, “In FX markets a 1% move in a currency is not considered particularly material but the yuan is not just any currency. Volatility is low and accordingly speculative positions tend to be very large,”
So the re-convergence between onshore and offshore rates for the Chinese currency has been “material…as the PBoC has deliberately lead the way by weakening the official daily fix to its softest against the USD in over two months”.
The key here is that the PBOC is weakening the yuan into a period of USD weakness and euro strength, so it is a real weakening on China-specific events.
So the question is what is going on, what does it mean for Australia and perhaps why is the Aussie dollar not paying any attention?
The continued appreciation of the yuan over the best part of the last 5 years has put exporters under pressure and their complaints have been loud recently. The ANZ noted that these complaints have some merit:
“According to the BIS the real effective exchange rate has risen by over 20% in the past three years. Notably, two thirds of that rise has occurred in the last fifteen months.”
But the recent fall in the Chinese data flow, which has been most highlighted by the HSBC Chinese PMI’s, into negative territory is telling even the China bulls that the economy is slowing relative to expectations. Indeed the ANZ said that a “distinct element of macro market risk has entered the equation”.
Copper in Shanghai has been under pressure, according to the ANZ, which says that prices are back to their July 2013 level. Yesterday the Shanghai Metals Market, the world’s biggest copper market by volume, wrote in their daily commentary that “On Tuesday, holders of imported copper were in a rush to sell given tight cash flow by month’s end and weakening RMB, causing spot discounts in copper market to fall. The influx of hedged goods exacerbated oversupply pressure in the market”.
This saw miners on the FTSE under pressure, with Rio Tinto losing 2.8% overnight, BHP Billiton down 1.6% and Anglo American falling 2.2%.
The Shanghai Stock Exchange has also been under pressure, falling almost 5% over the past few days.
All this is a warning to Australia and global markets, according to the ANZ, which ended its piece with a warning:
In China what we are seeing is a classic risk-off move in the world’s second largest economy. FX, equities, commodities and market interest rates are sharply lower. So far, the reaction of other global markets has been remarkably relaxed, if not perverse. It is questionable how long this can persist. At the very least the economic message that asset markets are currently sending is not pleasant and more precautionary pricing is warranted, even if things ease up.
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