Aussie dollar plunges again amid yuan devaluation

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The Australian dollar has collapsed again after China's second day of currency devaluation sent shockwaves through global markets.

The Australian dollar has collapsed again after China's second day of currency devaluation sent shockwaves through global markets.

At 1700 AEST on Wednesday, the currency was trading at 72.62 US cents, down from 73.16 cents on Tuesday.

The People's Bank of China lowered the value of the yuan against the greenback for a second consecutive day, devaluing it by 1.62 per cent.

The currency shift had a ripple effect on international markets, with the Aussie following most major currencies by plummeting.

CMC Markets chief analyst Ric Spooner said the Australian dollar had plunged two per cent in two days amid concerns over the economic health of its largest trading partner.

And he said there was a possibility markets could see more fireworks on Thursday.

"If the yuan continues to be devalued against the US, I would expect the Aussie to also fall," he said.

China's 2 per cent devaluation of the yuan has continued to ripple around Asia, sparking investor fears of declining Chinese momentum.

The central bank had billed Tuesday's move as a free-market reform but experts suspect it could be the beginning of a longer-term slide in the exchange rate to make China's ailing exports more competitive.

The rapid drop in the value of China's currency - more than 4 percent in the last two days - dealt a body blow to appetite for risky assets globally, with equities, currencies and commodities coming under selling pressure as money managers weighed the implications of China's latest policy move.

"China is not waging a currency war; merely fixing a discrepancy," China's state-owned newsagency Xinhua said in a comment piece.

"The central parity rate revision was designed to make the yuan more market-driven and in line with market expectations. The lower exchange rate was just a byproduct, not the goal."MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 1.5 percent to two-year lows. Stock markets from Australia to Singapore were a sea of red in early deals.

Jens Nordvig, managing director of Nomura Securities, said in a note the yuan's weakness over the last two days has the "potential to turn into a trend very quickly" and can impact U.S. growth and "meaningfully impact risk sentiment".

The Dow fell 1.2 percent and the S&P 500 shed 1 percent as China's currency move on Tuesday added to worries about the global economic outlook and hit companies with large exposure to China, such as Apple Inc (AAPL.O) and Caterpillar (CAT.N).  

Many Western firms have already been reporting slowing sales in China as its economy cools.

Emerging market currencies from Indonesia to Brazil reeled as investors feared central banks around the world could rush to weaken their own currencies in response.

That meant only the greenback was left standing tall with the U.S. dollar holding near a two-month high of 125.15 yen, while the broad dollar index .DXY was stuck within recent trading ranges.

Currencies considered as China proxies were singled out for special punishment, with the Australian dollar nursing losses at 0.7255 per dollar after falling more than 1.5 percent overnight.

"The bottom line is that we believe investors will orientate portfolios towards more rate cuts rather than currency weakness. Real rates are way too high, in our view," wrote Sean Darby, chief global equity strategist at Jeffries.

Commodities investors worried that prolonged yuan weakness could revive deflationary pressures, with a 19-commodity Thomson Reuters/Core Commodity CRB Index .TRJCRB holding near lows not seen since 2003.

U.S. crude oil futures fell more than 4 percent overnight to a six-year low before managing to recover 1.1 percent to $43.57 a barrel early on Wednesday. 

Copper and aluminum also hit six-year lows on Tuesday as the cheaper yuan fueled worries the world's top metals consumer would cut back on imports. 

Copper posted a modest bounce after the overnight slide, with three-month copper on the London Metal Exchange (LME) edging up 0.7 percent to $5,159 a tonne CMCU3.

Bonds were the solitary bright spot, with the benchmark 10-year Treasury note yield sliding five basis points to a three-month low of 2.087 percent.

Its 10-year Japanese counterpart fell to a three-month trough of 0.38 percent.

Analysts pondered how investors will react to China's surprise decision once the dust begins to settle.

"The bottom line is that we believe investors will orientate portfolios towards more rate cuts rather than currency weakness. Real rates are way too high, in our view," wrote Sean Darby, chief global equity strategist at Jeffries.

Meanwhile, the devaluation by the People's Bank of China (PBOC) also raised further questions regarding the health of the Chinese economy and cooled appetite for risky assets and commodities.

U.S. crude fell more than 4 percent overnight to a six-year low before managing to recover 1.1 per cent to $43.57 a barrel early on Wednesday.

Copper and aluminium also hit six-year lows on Tuesday after China devalued its currency, fuelling worries about a glut of aluminium and boosting the cost of commodities for the world's top metals consumer.

Copper posted a modest bounce after the overnight slide, with three-month copper on the London Metal Exchange (LME) edging up 0.7 per cent to $5,159 a tonne.

The benchmark 10-year Treasury note yield declined to a two-month low of 2.114 percent overnight before pulling back to 2.155 per cent. Its 10-year Japanese counterpart fell to a three-month trough of 0.38 per cent.

Source Reuters

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