The Australian dollar fell against the Chinese yuan from March to early May, when it reached lows since June 2016 as the yuan rose about 3% against AUD in this time, outperforming most Asian currencies but not the US dollar, points out Frances Cheung, Research Analyst at Westpac.
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“The AUD/CNY recovery since early May has been backed by a pickup in Australian growth and the RBA’s clearer message that it expects the next move in the cash rate to be up.”
“But while a rebound in commodity prices recently has also helped AUD, our base case multi-month is for yield differentials to weigh on AUD. US interest rates are now comfortably above Australia’s out to 10 years, with the prospect of further increases in the USD yield advantage into 2019.”
“This should undermine AUD in coming weeks and months, but the yuan should be less vulnerable, as Chinese policymakers prioritize currency stability to promote domestic confidence and keep a lid on capital outflows.”
“If the US dollar trends higher in line with this outlook, AUD/CNY should ease to around 4.84 (AUD/USD 0.75 and USD/CNY 6.45).”
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