NZ dollar falls as China devalues

The kiwi dropped by just under US1c to a low of US65.38c in response to the news. Photo / File

The New Zealand dollar and several other regional currencies fell sharply yesterday after the US dollar spiked higher in response to China's 1.9 per cent devaluation of the yuan, which is expected to pave the way for a more market-led value for the currency.

The kiwi dropped by just under US1c to a low of US65.38c in response to the news, while there were falls of similar magnitude in the Australian dollar, the Singapore dollar and the South Korean won.

China's central bank had earlier described the move as a "one-off depreciation" based on a new way of managing the exchange rate that was more reflective of market forces.

"Since China's trade in goods continues to post relatively large surpluses, the yuan's real effective exchange rate is still relatively strong versus various global currencies, and is deviating from market expectations," the bank said. "Therefore, it is necessary to further improve the yuan's midpoint pricing to meet the needs of the market."

Talk of possible devaluation had been in the market, but traders were surprised by the magnitude of it, said Bank of New Zealand currency strategist Raiko Shareef.

"With a slowing economy, China is looking at all sorts of levers to pull to support it, and a weaker currency is certainly one of those levers," Shareef said.

Khoon Goh, a Singapore-based strategist at Australia & New Zealand Banking Group, told Bloomberg: "It looks like this is the end of the fixing as we know it.

"The one-off devaluation of the fix and allowing more market-based determination takes us into a new currency regime."

Analysts linked the move to China's attempts to add the yuan to the benchmark currency basket, which would give the country Special Drawing Rights - the ability to borrow from the International Monetary Fund (IMF).

The IMF this month said it would delay any move to add the yuan to its benchmark currency basket until after September 2016.

China had to balance the need to boost exports with the risk of a cash exodus, Tom Orlik, chief Asia economist at Bloomberg Intelligence, said in a research note.

He estimated a 1 per cent depreciation in the real effective exchange rate boosted export growth by 1 percentage point, with a lag of three months. At the same time, a 1 per cent drop against the US dollar triggered about US$40 billion in capital outflows, he said.

"The risk is that depreciation triggers capital flight, dealing a blow to the stability of China's financial system."

Data over the weekend showed China's overseas sales fell 8.3 per cent from a year earlier in US dollar terms in July, well below the estimate for a 1.5 per cent decline in a Bloomberg survey.