China’s yuan reval

Posted by Scriptaty | 9:33 PM

Most analysts have downplayed the overall impact of the Chinese yuan revaluation (see “China abandons yuan peg,” Currency Trader, August 2005, p. 9) on the Aussie dollar and kiwi. However, it can be considered a moderately supportive factor, from a commodity price standpoint. On the day the news hit the forex markets, a slight uptick was seen in the Aussie and kiwi.

“I see the revaluation as being positive for the kiwi against the greenback,” Levine says. “The appreciating yuan is broadly positive for commodity prices, which benefits the kiwi.”

Looking at the Aussie dollar, Hughes adds, “the yuan reval will boost Chinese demand for commodities, and because Australia is a big commodities exporter, you would have to conclude that the revaluation will be a bullish factor for the Aussie against the greenback.”

Nonetheless, analysts have admitted that the 2.1-percent revaluation of the yuan is merely a token gesture and not economically significant in the long run.

“The bottom line is that it is not a screaming trade,” Callow says. “It’s probably a mild positive. It’s not likely to be a key factor in and of itself for the next year.”

However, currency watchers believe the revaluation was likely just the first of a longer-term process of additional yuan appreciation, which eventually could begin to have a market impact.

Callow notes that additional yuan appreciation may slow the Chinese economy, which could actually be a negative factor for both the Aussie dollar and the kiwi. Slower Chinese growth could weigh on commodity prices, and in turn depress these currencies.

“The health of China is important to Australia, because of the size of demand for Australian exports,” Callow says. “Australia needs China to keep growing at a robust pace.”