Aussie Dollar Drops Back Below $0.74 Following Yuan Devaluation

Australian One Dollar Coins over Black

The Aussie dollar is see-sawing, unable to find its footing. The local currency fell yesterday on poor trade data coming out of China. But overnight it gained ground, rising above $0.74 as commodity prices rebounded. Yet even that didn’t last long. China’s decision to devalue its currency sent traders rushing towards US dollars, sending the AUD crashing below $0.74.

It’s a lot to take stock of, so let’s begin with this morning’s movements.

The Aussie dollar was up in early morning trade, on the back of a weakening US dollar. At 10:50am AEST, the AUD was trading at $0.74. That was up slightly from $0.739 on Monday.

But by midday, the Aussie dollar lost its gains, trading at $0.733.

The earlier uptick came after the US dollar shed 0.5%. The greenback’s decline stretched out for third day in a row. It’s now in its worst run since in two months. And it’s down from a recent four month high.

Causing this blip was a recovery in commodity prices. Oil, gas and copper prices are all up, after a torrid month in July. Prices edged down to their lowest in over four years during last month.

Two things sent the Aussie dollar below $0.74 again.

The first was China’s decision to devalue the yuan against the US dollar. China’s central bank lowered its reference rate for the yuan by 1.9%. It did this because there are growing concerns about the extent of China’s economic slowdown.

Secondly, speculation for an imminent US rate rise also weighed on the Aussie dollar.

The rumours of a September rise won’t go away, despite poor US economic data. Though it’s debatable how eager the US Fed is to lift rates. Just today, US household spending expectations dropped to their worst level in two years. The timing of a September rate hike makes no sense in that context.

Commodity prices lift Aussie dollar

The Aussie dollar could rely on a continued rebound in commodity prices to edge lower.

Rising commodity prices present challenges for exporters like Australia. On the one hand, a price recovery helps lift export earnings.

But the upsurge in commodity prices also forces the US dollar down. That’s exactly what happened overnight. And it sends commodity currencies, like the Aussie dollar, trending higher.

All major commodity exporters, including Canada, saw their currencies rise.

But it’s not just the chance of US interest rates weighing on commodity currencies. The current rebound in commodity prices might not last.

Oil was the biggest reason commodity currencies gained since yesterday. Overnight, the price of WTI crude oil etched up above US$44 a barrel. That ended three days of losses since last dating back to last week.

Traders bought into oil believing its price isn’t going to lower too much. Prices have fallen by US$15 since July. They’ve levelled off since, but it’s unclear whether oil is trading at its floor price.

Chinese trade plunges, weighing on Aussie dollar

Chinese trade declined 8.3% year-on-year in July. Both exports and imports fell for the year to June. At the same time, producer prices shrank to their lowest level in six years.

The trade data sent the Aussie dollar lower yesterday. But a cheaper dollar is the worst of our problems. The worse-than-expected trade data is a major worry for the Aussie economy.

Cheaper commodity exports means little when the world’s biggest buyer is importing less. If China’s not buying or selling as many goods, it won’t be long before demand for commodities falls too. It already is for that matter; it’ll just pick up.

China’s slowdown will, of course, impact Australia’s fortunes too. How can it not?

China is our biggest trading partner. The trade data puts official targeted growth of 7%at real risk. That’s before we account for their recent stock market failures. It all points to a hard landing for China in the future.

If that’s the case, it means only thing for the Aussie economy: recession.

The Daily Reckoning’s Greg Canavan says Australia is on course for its first recession in 23 years.

In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why our economy finds itself in the hole it’s in. He’ll show how debt levels have spiralled out of control. And he’ll prove why that means a recession is almost inevitable.

But there are actions you can take right now to lessen the blows of the recession.

Download your free copy today to learn how to protect your wealth from the fallout of the crash. To find out how to download his free report right now, click here.

Mat Spasic,

Contributor, The Daily Reckoning


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