Yuan to drag down Aussie

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From Fairfax:

The fortunes of the yuan, China’s currency, will have more influence on the Australian dollar’s value next year even as metals prices stabilise, Societe Generale says.

Global fixed income strategist Kit Juckes argues that China’s slowing growth means the yuan will depreciate against the US dollar, as its peg to the US currency loosens, and this will weigh on emerging and developed market economies with close trade links.

While the currencies of energy exporters such as Canada, Norway and Russia will strengthen as oil prices recover, stabilising metals prices will be less positive for Australia and other big exporters to China, Mr Juckes says.

…Mr Juckes argues that the inevitable depreciation of the yuan as the Chinese economy slows will force exporter currencies into another round of competitive devaluations.

He see the Chinese currency depreciating by more than 6 per cent in 2016.

I agree. The basic mechanism is that a falling yuan will increase commodity competitiveness for Chinese producers thus hitting China-export dependent nations harder. A falling yuan will probably also reduce capital outflow to these countries as authorities shut as many channels as possible to prevent a yuan collapse.

Thus the most Chinese dependent economies will see growth hit hardest with lower interest rates and a lower currency.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.