FX comment – Commodity and Asian currencies under pressure after weak China data

by: Roy Teo

 

 

Commodity currencies under pressure after weak China manufacturing PMI

Both the Australian (AUD) and New Zealand dollar (NZD) were sold off aggressively this morning after China manufacturing PMI in July slumped to the lowest level since April 2014. This has reignited market fears that the Chinese economy surprising resilience in the second quarter (Q2 GDP was steady at 7% against market expectations of decline to 6.8%) may not be sustainable after all. At the time of writing the AUD was lower by 40 pips to 0.7310 after touching a low of 0.7304. As both Australia and New Zealand commodity exports are highly reliant on China, market speculation that both central banks may need to ease monetary policy to stimulate the economy sooner than later will continue to weigh on the AUD and NZD. We expect both the Reserve Bank of Australia and Reserve Bank of New Zealand to cut the Official Cash Rate by 25bp in this quarter. For more details, please refer to our FX Convictions – Parity for EUR/USD published on 24 July 2015. Our 2015 year end forecasts for AUD/USD and NZD/USD are 0.70 and 0.63 respectively.

 

Asian currencies also lower due to weaker exports concerns

The South Korean won (KRW), Taiwan dollar (TWD) and Singapore dollar (SGD) reacted more negatively after China’s weak data this morning. This is due to these economies larger exports exposure to China. Overnight, copper a gauge of global growth slumped below USD 240. Fears of weaker global demand is likely to put downward pressure on oil and other commodities. As inflation in Asia, with the exception of Indonesia and India are below the central banks’ target, market speculation that monetary policies will be looser will continue to weigh on Asian currencies. Looking ahead, we expect the People’s  Bank of China to cut the benchmark rates by 25bp and the reserve requirement ratios by 50-100bp in the coming months to support the economy. The current resilience in the Chinese yuan is unlikely to be sustainable in our view. We expect the yuan to decline to 6.30 against the US dollar by the end of this year.