AUD/CNY: Risks are to the upside – Westpac

Westpac analysts note that the Australian dollar and Chinese yuan have both fallen about 2-3% against the US dollar over the past 3 months, leaving the cross only slightly higher overall.

Key Quotes

“At times the correlation is very high e.g. on the break of USD/CNY 7.00, but there is still plenty of room for volatility given divergent domestic factors.”

“We expect the RBA to hold steady at 1% in Sep then cut the cash rate in Oct, while maintaining a dovish tone. This should continue to weigh on AUD on crosses but markets are already priced for -36bp of easing by end-2019.”

“AUD/USD probably also has a lot of bad news on US-China trade priced in, judging by spec positioning. And while the best is surely past in terms of commodity prices, Australia’s latest trade report showed a record surplus.”

“The trade-weighted yuan is already at lows since 2014 and capital outflows remain a concern for Chinese policymakers. So sharp yuan depreciation against US$ seems unlikely. Our base case for USD/CNY year-end is 7.20. With AUD/USD at 0.6700, AUD/CNY would be around 4.82, but nearer term, risks are to the upside, to 4.90.”