The Aussie dollar fell sharply against the US dollar this morning. Just after 11am AEST this morning — 9pm EDT (New York time) — it tumbled from US$0.7429 to US$0.7374 within about fifteen minutes. At the time of writing, it’s down to US$0.7321.
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Why did this happen? Well, this time, it’s not Australia’s fault. China did it.
The People’s Bank of China, China’s central bank, sets a daily middle point for the yuan against the US dollar. In an official statement this morning, the Bank said ‘For the purpose of enhancing the market-orientation and benchmark status of central parity, the PBC has decided to improve quotation of the central parity of RMB against US dollar.’ It’s not the first time they’ve done this either. In answering press questions on why they decided to devalue the yuan by 2% now, a spokesman for the bank said:
‘The U.S. economy is recovering and markets are expecting at least one interest rate hike by the FOMC this year. As such, the U.S. dollar is strengthening … Emerging market and commodities currencies are facing downward pressure … As China is maintaining a relatively large trade surplus, RMB’s real effective exchange rate is relatively strong, which is not entirely consistent with market expectation. Therefore, it is a good time to improve quotation of the RMB central parity to make it more consistent with the needs of market development.’
In other words, they’re trying to correct the difference between the market expectation of the RMB (renminbi, or yuan) and where they think it should be headed. This is designed to prevent a shock further down the line.
When the Bank made their change, people started buying up US dollars. This caused the value of the dollar to rise in relation to other currencies. Including the Aussie dollar. So far today, the Aussie dollar has fallen nearly exactly in line with the yuan.
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Wondering how currency changes like this might affect your investment opportunities? Money Morning editor Ken Wangdong and publisher Kris Sayce have the answers. They’ve recently released a report titled ‘Three Emerging Markets Primed for Explosive Growth in 2015’. It’s available for free here. In this report, Ken and Kris explain how growth in some emerging markets can strengthen currency and increase return on equity investments, giving you a double benefit. Read this report and you’ll also discover their picks for this year’s top three ‘explosive markets’.
Contributor, Money Morning