Australian dollar falls as Chinese yuan devalued

The Australian dollar plunged more than 1 per cent on Tuesday when China devalued the yuan after more than a year of steady appreciation against its main trading partners, including Australia.

In late local trade, the Aussie was fetching US73.17¢, compared with US73.95¢ at the same time on Monday, and an intraday high of US74.36¢.

The local dollar had hit an intraday low of US73.06¢ immediately after the People’s Bank of China reset the yuan down 1.86 per cent against the US dollar, with which it has a managed peg.

The Chinese currency over the past 12 months has appreciated by almost the same as the greenback, which has climbed 15 per cent on a trade-weighted basis.

Chinese authorities had become concerned about the loss of competitiveness in export markets, as well as a widening in the difference between its daily yuan fix and the spot price of the currency.

This had moved out to the extreme of a trading band which allowed movements of 2 per cent either side.

The Aussie dropped from US74.4¢ to US73.5¢ within minutes of China’s devaluation. Other regional currencies, including South Korea’s won and the Singapore dollar, were also hit.

Westpac senior currency strategist Sean Callow said the local unit was collateral damage as the US dollar shot up.

“The yuan has been very boring for a very long time to the point most had stopped paying it any attention,” he said.

“But China’s decision [on Tuesday] to weaken their own currency midpoint has started a sudden wave of purchasing.

“It seems the export numbers over the weekend were the final straw for the currency being kept steady as Chinese authorities try to promote stability.”

TD Securities chief Asia-Pacific macro strategist of foreign exchange Annette Beacher said the depreciation would be a shock to otherwise sleepy markets.

“The People’s Bank of China is simultaneously looking at the recent poor trade report and improving the yuan’s pricing mechanism,” Ms Beacher said.

The PBoC described the move as a “one-off depreciation”, based on a new way of managing the exchange rate that better reflected market forces.

“Since China’s trade in goods continues to post relatively large surpluses, the yuan’s real effective exchange rate is still relatively strong versus various global currencies, and is deviating from market expectations,” the bank said.

“Therefore, it is necessary to further improve the yuan’s midpoint pricing to meet the needs of the market.”

The bank said the midpoint would be based on market makers’ quotes and the previous day’s closing price.

Analysts said the weakness in the Australian dollar could continue throughout the week.

“This looks like a move to a more open market policy,” OANDA senior foreign exchange dealer Stephen Innes said.

“We may see a lot of pressure on all local currencies but the market is extremely volatile at the moment.”

The Australian dollar had been fairly resilient since late last week, hovering above US74¢ despite a weakening US dollar and a jump in oil prices.

However, AllianceBernstein’s director for Asia-Pacific fixed income, Hayden Briscoe, said China’s move was likely to hit all commodity currencies.

“This is just as impactful as the oil pricing dropping, because everybody trades with China,” he said.

“Every commodity-based currency is now under pressure as well, because they’ve just lost some revenue on that devaluation.”

Source：http://www.smh.com.au/business/markets/australian-dollar-falls-as-chinese-yuan-devalued-20150811-giwco8.html