After ending last week on an uptrend, the AUD/USD exchange rate was brought down by poor Chinese Imports, Exports and PPI data released over the weekend, slipping from a starting point of 0.7416 to 0.73555.
Just as the ‘Aussie’ was beginning to regain its momentum in the later hours of Monday, disaster struck when the People’s Bank of China (PBoC) opted to devalue the Yuan (CNY) by nearly 2% against the US Dollar. Crashing down from a high of 0.7434 in the immediate aftermath of the move the AUD/USD pairing was reduced to 0.7321. Given the close economic ties between Australia and China this was a somewhat inevitable result, as commodity currencies and the Australasian basket in general all experienced substantial drops across the board.
Wednesday saw a good improvement in Australia’s Westpac Consumer Confidence Index, with the measure rising above expectations to reach 99.5 instead of 94.5. This potential rallying point for the ‘Aussie’ was overshadowed by the occurrence of a second day of Yuan depreciation in spite of the PBoC’s previous assurance that it would be a one-time thing. In response the AUD/USD exchange rate struck a fresh monthly low of 0.7237. Speculation began to rise about the chances of a currency war being either the goal of the Chinese or a simple side effect of their actions, as other currencies might be required to start being devalued in order to retain a competitive edge.
Although the ‘Greenback’ was undoubtedly one of the few currencies to derive a tangible benefit from the PBoC move, questions began to arise as a second depreciation occurred on Wednesday. Fears that the US Dollar is getting too strong compared to rivals, with the potential to drive down exports and even trigger domestic deflation, have led to suggestions that a Fed interest rate rise may not come in September after all. Consequently the US Dollar began to slump somewhat yesterday, leading to the AUD/USD exchange rate clawing back losses to rise to a peak of 0.7389.
Reserve Bank of Australia (RBA) Deputy Governor Philip Lowe put something of a dampener on this resurgence today, along with a third consecutive night of Yuan devaluation. Traders had already begun to worry that an RBA interest rate cut could result from the slumping value of the ‘Aussie’ and the global commodity market, and Lowe’s mention of a ‘chain reaction’ sounded distinctly dovish.
Good Retail Sales for the US helped consolidate the resultant gains of the ‘Buck’, as the estimate of 0.6% growth proved accurate. Some analysts and officials remain confident that lift-off will still occur in September on the strength of these numbers in spite of global developments, although there have been admissions that the call will be decidedly more marginal than previously expected.
Due on Friday are the PPI and Industrial Production figures for the US, which could provide further compelling evidence for an upcoming Fed rate rise and thus give the ‘Greenback’ another rallying point. The question of whether the PBoC will commit to a fourth day of Yuan depreciations also hangs over the AUD/USD pairing tonight, as does the impact that this week’s events will have on future RBA policy.