Australian dollar coin
A one Australian dollar coin is seen in this picture illustration taken in Sydney, Australia, July 29, 2015. Reuters/David Gray

Bell FX Currency Outlook: China’s move to a more marketorientated currency is causing volatility and uncertainty – itmight take a while until there is clarity.

Australia: The Chinese move this week to devalue the CNY has had ahuge impact on FX markets. Overnight risk aversion amid Chineseuncertainty seemingly climaxed as equities and bond yields stagedimpressive reversals. It was turn of the USD to fall victim to the volatilityovernight, as expectations for a September rate lift-off have dissipated.After setting a new trend low at 0.7217, there was significant USD sellingpressure. A bounce in commodities and lower U.S. yields drove the AUDback up to 0.7388. AUD opens in Asia 2.2% higher from 0.7217 lowposted yesterday, due to dovish shift in Fed expectations and recovery incommodities. Key today will be CNY fix and moves in EM currencies andassets. One would suspect that the AUD reaction will be much calmer atthe fixing today. Favour sitting on the sideline at the moment until theoverall picture becomes much clearer.

Majors: Yesterday, China set the USD/CNY fix at 6.3306, around 1.6%higher than the previous day. That was higher than expected, althoughsome depreciation was forecast. The new fixing method is based on theprevious day close plus demand and supply condition in the foreignexchange market and exchange rate movement of the major currencies.With the new fixing methodology, the fixing will be determined much moreby the market which will result in increased volatility. Importantly the 2%band does still apply. Markets are concerned because it impliesweakness in the Chinese economy, and depreciation of a normally stablecurrency could lead to corporate losses, foreign investor losses on localasset holdings and general volatility in asset prices leads to uncertainty.This drove the decline in equity markets through the London session andlower yields, as markets worry about the Fed delaying its rate hike.

Economic Calendar 13 AUG

  • JN Machine Orders Jun
  • AU Consumer Inflation Expectation Aug
  • GE CPI Jul (final)
  • US Retail Sales Jul

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