The Australian Dollar (AUD) has seen its short-term fightback against the major currencies face a setback yesterday after the Peoples Bank of China (PBoC) changed the trading range for the Yuan against the US Dollar (USD), which effectively devalued the Yuan by 1.85% instantly.
China’s foreign trade performance has been worsening, July exports plunged 8.3% on an annual basis, lending more concern for the world’s second largest economy. Westpac senior currency strategist Sean Callow said “So this step looks as though (China) is loosening the leash on the yuan and allowing it to weaken in order to help exports – also because inflation is well under control.” He also commented that “There’s broad demand for the US dollar against a range of Asian currencies on the expectation that the PBoC is going to let its currency depreciate far more substantially over the next few weeks and months,” he said.
China’s economy is expanding at its weakest rate since 1990 and slowed further this year to 7% in the first two quarters; along with this the Chinese Central bank has tried to boost lending by cutting the Interest rates four times since November 2014. The continued weakness in the Chinese economy is having a knock on effect to the AUD as we continue to struggle against the majors of the US Dollar (USD) Sterling (GBP) overall.
The AUD/USD exchange rate had traded as high as 0.7441 on Tuesday and dropped as low as 0.7279 after the PBoC announcement, a huge drop of 2.2%. A slight recovery overnight has seen the AUD/USD exchange rate trading at 0.7304 at 08:00 AEST.
In addition to the shock move from China, Tuesday also saw the release of the National Australia Bank business confidence index for July which dropped from 8 points to 4 points on the back of concern about the economic growth in China from the mining sector in particular.
Today sees a raft of announcements from Australia, China and then the UK which is looming as another volatile day on the currency markets.
We begin with the Westpac Consumer Confidence, followed by Wage cost index for Australia. This afternoon will see a release of figures from China including Industrial production and retail sales, which as we have seen has the potential to cause a lot of movement of the AUD depending on the figures released. Wednesday evening then sees attention turn to the UK with some important Employment and Weekly Earning results due at 18:30 AEST. The 3-month Unemployment rate is due to remain steady at 5.6% so any result either way could see further movement in the AUD/GBP exchange rate which has seen a lot of change in the past 24 hours alone, reaching a low of 0.4673 & a high of 0.4767 a range of just over 2%.
The AUD/GBP exchange rate is trading at 0.4688 at 08:00 AEST today.