The Australian Dollar to US Dollar (AUD/USD) exchange rate has fallen below 0.70 this morning as markets continues to react to trouble in China.
The Australian Dollar hit a new 3 month low yesterday after the Central bank of China devalued the Yuan (CNY) for the second time in a week. In response the local currency tumbled to its weakest levels since September 30th 2015. On Thursday Australian shares shed more than 33 billion following the announcement as share trading was again suspended. The latest fix by the People’s Bank of China, weakened the official offshore currency reference exchange rate to 6.5646 against the USD (CNY/USD); 0.5% weaker than Wednesday level.
At 7am (AEDT), the local unit was trading at 0.6967 US cents, down from 0.7032 cents yesterday.
The continual weakening of the Chinese Yuan Renminbi (CNY) fixed rate against the USD has added fuel to speculation that the currency will soon be de-pegged from the USD in favour of a basket of currency valuation that is seen to better represent China’s world trading relationships. A depreciating Chinese currency makes China’s exports cheaper overseas, raising concerns about the potential for competitive devaluations and deflation among the country’s trading partners.
The “Aussie” has remained surprisingly resilient in recent months, remaining firm despite the recent rate hike in the US and soft economic data out of China. The “teflon” currency now is under pressure as recent declines raise speculation that the Reserve Bank of Australia may be prompted to cut interest rates when they meet next in February in order to stay competitive with China’s large export sector.
Recent falls in commodity prices are also not assisting the local currency, with iron ore slipping another 0.5 per cent to $US42.91 a tonne following news of North Korea’s decision to detonate a suspected thermonuclear bomb. There has been “a very sharp decline for all commodity currency dollars, as concerns over the China slowdown have now bloomed into a full-blown panic,” BK Asset Management’s managing director of FX strategy, Boris Schlossberg said “To add salt to the wound, the region also saw a flare up of geopolitical tensions as reports swirled around that North Korea may have tested a hydrogen bomb.”
The dovish tone on minutes released from the US Federal Reserve meeting (FOMC) on Wednesday evening provided little support for the downward spiralling “Aussie”. News that the decision to raise interest rates last month was a “close call” was overshadowed by the Renminbi devaluation.
Domestic economic data out today includes the release of official retail spending figures for November and the Australian Industry Group’s Performance of Construction Index for December. The forecast for a decline of 0.1% in Retail spending is expected to have minimal impact on the local market however a result significantly below expectation may act to spook investors driving further sell-off of the local currency.
The big news for the day is from the North American market in the form of employment figures. Investors will be on the lookout for any clues of the next Fed rate hike. While the forecast is for a small decline on the December result; the Automatic Data Processing (ADP) figures, often an indicator for the payroll data, showed private-sector employment gains in the US ramped up last month. If this is the case we can expect to see significant movement in the overnight session.