Aussie dollar takes a hit from devalued yuan

The offshore Chinese yuan dropped more than 2.6% against the Greenback during Asian trading hours. The move came after the People’s Bank of China (PBOC) shocked markets and lowered the yuan reference rate by 1.6% for a second consecutive day. Yesterday’s cut was 1.9%.

Earlier this week, the PBOC said that the decline in the reference rate was a one-off adjustment because the yuan effective exchange rate had become excessively strong. After Wednesday’s cut, the PBOC said that the currency will not continuously lose value and that the move of the yuan reference rate is regular. The central bank added that there is no economic basis for the yuan’s constant devaluation.

The PBOC’s actions have drawn comment from the International Monetary Fund (IMF). The IMF said that the new mechanism for central parity is a welcome step, and that these alterations from PBOC will have no direct implications for the criteria used in determining the composition of the Special Drawing Rights (SDR). It also said China should aim to have an effectively floating exchange rate system within two to three years.

With this in mind, a spill-over effect can be seen in the GBP/AUD rate, which rose more than 0.6% after the PBOC declaration to hit a new six-year low. In its quarterly monetary policy statement, the Reserve Bank of Australia (RBA) said that risks from China are tilted to the downside.

Weakening the yuan will make goods from Australia more expensive in China, the former country’s top trading partner. This may weigh on growth and push the RBA cut in interest rates further. Certainly, Australian two-year government bond yields sank alongside the upward jump in USD/CNH.