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The Australian economy has tied itself so tightly to the Chinese, that fluctuations in the yuan have a dramatic impact on the Aussie dollar, according to Citi’s Gregory Anderson.Anderson notes that Australia now exports more, as a percentage of GDP to China, than France does to Germany and Italy.
The impact of this integration on the Aussie dollar is strong, with now reflecting moves in the yuan.
The correspondence between the CNY NDF and AUD has been extremely pronounced so far in 2011, and especially so over the last two weeks when commodity prices have tailed off. The answer seems to be the ongoing integration of the Australian and Chinese economies which has intensified in recent years. Australia now exports a bigger share of its GDP to China (5%) than France exports as a share of its GDP to Italy and Germany. The problem is that the degree of implied AUD leverage on CNY. If the relationship of the last three year persists, CNY NDFs that price in an ultimate move to say 6.00 would imply AUD somewhere between 1.20 and 1.30 depending on what degree of leverage you assume.
And we’re expecting a significant revaluation of the yuan in the short-term. If it’s as dramatic as the 6.00 move Citi’s Anderson suggests, then the Aussie dollar is about to move big too. It’s currently approaching $1.10.
Note, that any slow down in Australian exports to China, based on a decline in demand in that country, could affect the inter-connectivity of the currencies.