Competitive devaluations to come in the BIG one? and Australian consequences

Usd/Cny has gained for two straight days now(0,6% and 0,26% respectively), closing at the high of its trading band. Nothing strange with that initself. Why is that then? Well, the Chinese PMI yesterday fell from 44.6 to 38.8.
Chinese assetclasses are all way down this year.

Worries are now arising whether China will make dear policymistakes in adressing the falling domestic demand situation. Last week they already made one when they cut their exportduties, increasing competitiveness within an already falling market. This will increase deflationary pressures globally and weigh on equity markets going forward. (Admittedly, PBOC later today denied that the recent weakening of the CNY was part of any policy shift.) Eur/Usd bounced higher from 1,2570 up to 1,27 plus on the back of it.

Unfortunately, there is a real threat of this taking place as other countries have already started the competitive devaluation race in the face of falling domestic demand. The difference here is,,,,, the difference. China alone has the power to export deflation globally by itself. Not good. Also,,,, remember, China received massive inflows of speculative capital over the last years. A significant share of which is Usd funded.

This still represents a gigantic short Usd position. With Chinese equities and realestate getting hit a weakening CNY could be the trigger for another big wave of Usd buying. Not to mention the situation of other Usd thirsty emerging market countries such as Russia and perhaps soonish, Turkey.

If so, the Aud will come under renewed pressure as commodity prices would be presured further and global risk aversion would increase. China is the biggest export destination for Australia as well. The RBA cut rates by 100 BP today, but real rates are still too high at 0,95% (Nominal 4.25%, inflation 3.3%) in this credit crunching environment. The Aud should remain under pressure.

Going forward, the adjustment process for emerging market will become a very significant factor. In the process of staving off falling domestic, demand many will be tempted in using the currency tool. This will include emerging market countries and China. To be monitored.







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