Australian Dollar Takes a Hit on Yuan Devaluation, Westpac Report Investors Remain Beairsh on Outlook

The Australian dollar has been hammered by a 2% devaluation in the Chinese currency as investors retaining a negative bias on the outlook according to latest Westpac research.

The Australian dollar was perhaps the biggest victim in the G10 currency sphere of moves by China to devalue its currency in order to keep its economic growth rate propped up.

"The initial market reaction has been for weakness in any currency of countries that compete with China, notably in Asia. Commodity currencies have also been hit with large losses, particularly the Australian dollar. As with the rand, we are a little surprised by the extent of these moves. The dollar has broadly gained," says John Cairns at Rand Merchant Bank.

Cairns explains that Yuan weakness is negative for commodity prices as it raises the yuan price for mainland consumers.

"However, keep in mind that the move was only 2%, so one cannot justify more than a 2% fall in any price - which is small given the usual huge volatility in these markets," says Cairns.

The feed-through to the Aussie dollar complex is notable:

• The pound to Australian dollar (GBPAUD) is 1.04 pct higher on a day-to-day comparison at 2.1258.
• The euro to Australian dollar exchange rate (EURAUD) is 1.23 pct higher at 1.5048.
• The Australian to US dollar exchange rate (AUDUSD) is 0.95 pct in the red at 0.7341.

Note that the above are spot market quotes, your bank will make available the above rates with a spread subtracted. However, an independent FX provider will seek to get you as close to the market rate as possible, this can result in the deliver of up to 5% more FX.

The Aussie currency entered the week in reverse with data released on Saturday indicating Chinese exports fell -8.3%y/y versus the -1.5% expected and imports dropped -8.1%y/y versus -8.0% median forecast.

July’s trade balance printed at $43.03bn while analysts were looking for higher figure of $54.70bn.

“Taken together, the outcomes pointed to the limits on stimulus expansion from accelerating price growth even as headwinds facing the economy gather strength. That bodes ill for performance in Australia and New Zealand, for whom China is a leading export market. Negative spillover fears drove speculation about the possibility for further RBA and RBNZ interest rate cuts, weighing on the two currencies," says Ilya Spivak, Currency Strategist, at DailyFX.

Investors Forecasting a Lower Aussie dollar

Meanwhile, Westpac Bank has probed investors for their views on the Australian dollar’s outlook in their ‘Weekly Macro Survey’.

Responses on the level of AUD/USD in three months’ time were again skewed to the downside. 

“Again, most respondents expected the pair 0-3 cents lower, and around 15% were more bearish. Overall, however, the responses this week were a little more bullish, with around 15% expecting the Aussie 0-3 cents higher and a minority seeing even more upside,” says a note from Westpac’s strategy group.

The survey was sent out just after the release of the RBA decision and statement.

Two thirds of respondents expected the RBA to leave the cash rate target on hold over the next six months at 2.0%

“AUD was in the 0.7260-0.7430 range during the week of the survey and none expected the currency to remain unchanged.

Westpac is now forecasting AUD to fall to 70c against the US dollar by year end.