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AUD/CNY: Sharp decline may not extend much further - Westpac

Frances Cheung, Research Analyst at Westpac, points out that the Australian dollar has fallen against all major Asian currencies over the past 3 months, with the Chinese yuan’s 3.2% gain considerably smaller than most of Asia.

Key Quotes

The Aussie is also down against most of the G10, sliding from above AUD/USD 0.80. On our fair value estimates, the fall from there to around 0.76 was largely a correction from clearly overvalued to about fair value.”

“While Australia’s key commodity prices rose notably in November (a rise in Australia’s terms of trade, a fall in China’s), AU-US yield spreads are trending away from AUD, leaving fair value about flat near USD 0.76.”

“This suggests that the sharp AUD-driven decline in AUD/CNY and AUD/CNH since Sep may not extend much further. Broad stability on AUD/USD into early 2018 should be matched by range-bound USD/CNY trade assuming capital outflows remain muted and Chinese policymakers retain an apparent preference for FX stability, with volatility very low recently.”

“This points to AUD holding around 5.00 yuan multi-week, albeit with the usual tension around January, where volatility often picks up.”

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