Risk appetite a casualty of the China devaluation as markets question the strength of the Chinese economy

By Kymberly Martin

“Commodity-linked” currencies have been major underperformers after China’s surprise move to lower its currency yesterday.

Heightened risk aversion was the prevailing theme overnight, after the surprise move yesterday afternoon by the People’s Bank of China.

The PBOC fixed the USD/CNY almost 2% higher, in a move to close the gap between the onshore CNY and offshore CNH and allow a more market determined CNY. There appears to have been at least two motives (i) to assist export competitiveness (ii) to take a further significant step towards the liberalisation of the currency and capital account.

However, it also appeared to raise other questions in the market’s mind with risk appetite being a casualty. Equities declined across the board, as did commodities, with the exception of precious metals. The WTI oil price is almost 5% lower. In this environment, the “oil-linked” NOK and CAD have dropped more than 1% against the USD over the past 24-hours.

The AUD was a direct casualty of the PBOC move. It fell in classic knee-jerk response to China-focused risk and to risk aversion more generally. It was also sold as a liquid proxy for USD/CNY in particular and USD/Asia in general. Sharp falls were also seen in the likes of the South Korean Won and Taiwanese Dollar.

Overall, the AUD/USD has fallen more than 2.0% from early afternoon highs. Sentiment toward the AUD was also likely not helped by a softer AU NAB business survey yesterday. The AUD/USD sits at 0.7280 at present. Support is eyed at the end-July lows of 0.7235.

The NZD/USD also fell sharply on the PBOC announcement. Downward momentum was sustained overnight, as commodities fell and speculation regarding the strength of the Chinese economy abounded. From 0.6630 yesterday afternoon the NZD/USD now trades at 0.6520. Support is eyed at the early-Aug lows of 0.6490.

This evening’s release of July China data may have some bearing on whether this level is tested today, in the absence of scheduled domestic data releases. We continue to target 0.6200 by year-end.


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Kymberly Martin is on the BNZ Research team. All its research is available here.

Daily exchange rates

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