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China introduced new stimulus: it devalued its local currency by 1.9% and halted its grinding strengthening. This sent USD/CNY to a three year high and had ramifications across the board. The move was described as a “one off” by the authorities in Beijing, but we never know.

This  strengthened the dollar not only against the yuan but also against the Australian dollar.

The Chinese economy is slowing down, and this was seen in the recent trade data: Chinese exports fell much more than expected. A weaker currency could help boost exports. The fall of 8.3% in exports, y/y, was far worse than a drop of 1.5% expected. Also producer prices caused worries.

So, some sort of stimulus was not very surprising. And what type of stimulus? According to the trade based value, the yuan was actually appreciating by 14% in the past 12 months. While it was steady against the US dollar, it gained ground against many other peers such as the Japanese yen and the euro,  clearly hurting its exports.

What happened to the talk about  re-balancing the economy towards more consumption and less export oriented investments? That will probably take some time.

According to some analysts, the move could eventually hurt the dollar, as it may export Chinese deflation to the US and  cause the Federal Reserve to wait and see. But this is also for us to wait and see.

AUD/USD

A weaker Chinese  currency makes Australian goods, aka commodities, less  attractive. The Australian dollar enjoyed positive news last  week: strong employment data and “no worries” from the RBA on the A$. Yet the recovery is long.

In theory,  while Australian goods are less attractive to Chinese buyers, stronger Chinese growth as a result of this move could actually be a positive for the Australian dollar. More exports of finished goods would require more raw materials from Australia.

Could we see the Aussie bounce back?

AUD/USD, that was already trading comfortably above 0.74, slipped over 100 pips before stabilizing. Here is how it looks on the charts:

More:  Don’t Buy AUD Around Current Levels – Credit Agricole

AUD USD August 11 2015 falling after Chinese devaluation of the yuan