Justin Pugsley - Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
Justin Pugsley
Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
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Further CNY devaluations likely to drag AUD down

A question doing the rounds of the forex markets is over how long before China again devalues CNY as its economy is clearly slowing.

China’s and CNY’s fortunes are being played out on AUD/USD as the country is Australia’s largest trade partner and the world’s number one consumer of all kinds of commodities.

What’s happening in China strongly implies further falls for AUD/USD as the pace of commodities consumption there and global prices remain under pressure.

Highlighting the potential pressures on CNY, China’s foreign exchange reserves fell by a record $93.9bn in August, still less than many had feared, but it nonetheless highlights the cost to the People’s Bank of China in maintaining a stable exchange rate.

The PBoC is battling against rising capital outflows and a slowing export performance. China’s focus on wanting to shift from an export-driven economy to one more dependent on domestic consumption – like the US – will merely add to pressures on the exchange rate. Turning CNY into a reserve currency will certainly help that shift and potentially lend some support to the currency – but that day seems some way off.

Further CNY devaluations likely to drag AUD down

 

Even China’s huge FX reserves won’t last forever

However, China’s foreign exchange reserves are still huge at $3.5tn, down from $4tn at their peak mid last year. But if downward pressure remains on CNY, and it very likely will, then more devaluations are on the way. The PBoC will not want to squander all its reserves defending the currency as it is effectively subsidising those wanting to pull money out China by maintaining the exchange rate at an artificially high level.

It will very likely opt for a slow devaluation – but that is easier said than done. Witness failed efforts by China’s authorities to reverse huge falls in Chinese stocks. But so far, not too bad. In truth CNY has been falling versus the USD since around January 2014. Back then USD/CNY was around 6.0510 and more recently seen levels of 6.3700 – particularly following the August devaluation.

A major difficulty over predicting how China will respond to its slowdown is its opaque political system. Reports suggest a power struggle is going on at the highest levels of the Communist party, which in itself creates uncertainty and is a distraction from managing the economy. By contrast there was a lot more transparency and urgency when the US was dealing with the financial crisis.

Further falls in CNY will drag down other Asian currencies in its tailwind along with AUD and NZD versus USD and even EUR and GBP.

 

TECHNICAL ANALYSIS – More AUD/USD falls to come, but consolidation could be near

 

Much like with the fundamentals, the technical also suggest further losses for AUD/USD and the momentum on the long-term charts is all downward for now.

Current support levels can be seen around 0.6907, 0.6880, 0.6750 with 0.6500 and even 0.6000 positioned as long-term targets for AUD bears. There are clusters of resistance around 0.7017, 0.7124 and 0.7298.

In the short-term, AUD/USD could be approaching a period of consolidation with the RSI oversold at 25 and the gap between the dailies and 100-day and even the 20-day moving average has been widening. At some point these will converge again as reversion to mean is one of the most powerful forces in markets. For AUD/USD that could mean a period of consolidation or even a sharp snap back, say if sentiment suddenly improved towards China, the commodities complex and risk assets generally.

Nonetheless, periods of consolidation should be temporary and likely present ideal opportunities to short AUD/USD once falls resume.

 

By Justin Pugsley, Markets Analyst, MahiFX

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