The yuan is expected to depreciate further next year, taking the Aussie dollar with it, Societe Generale says. Photo: Bloomberg
The fortunes of the yuan, China's currency, will have more influence on the Australian dollar's value next year even as metals prices stabilise, Societe Generale says.
Global fixed income strategist Kit Juckes argues that China's slowing growth means the yuan will depreciate against the US dollar, as its peg to the US currency loosens, and this will weigh on emerging and developed market economies with close trade links.
While the currencies of energy exporters such as Canada, Norway and Russia will strengthen as oil prices recover, stabilising metals prices will be less positive for Australia and other big exporters to China, Mr Juckes says.
"Since Chinese growth and monetary, and foreign exchange policy will play a bigger role in the outlook for currencies of exporters to China, we are more comfortable looking for rallies in the oil-sensitive Norwegian krone, Canadian dollar and rouble than in hoping for a turnaround in China-sensitive ones," he wrote the bank's currency outlook for 2016.
These include the Australian and New Zealand dollars, along with a range of currencies from Latin America, Asia and Africa.
His analysis comes at the start of an important week of Chinese news, with market watchers alert to trade, inflation, money supply and industrial production data from the world's second-biggest economy.
The Australian dollar dipped briefly on Monday when the the People's Bank of China (PBoC) lowered the yuan reference rate by 0.21 per cent, to just under 6.4 to the US dollar, in response to a decline in offshore trade.
However, in late local trade, the Aussie had recovered to US73.38¢, compared with US73.13¢ at the same time on Friday and an intraday low of US73.22¢ on Monday. The local unit has proved resilient in recent months, and has diverged from fundamental drivers such as the terms of trade.
Analysts have attributed its strength to everything from increased merger and acquisition activity to the prevailing interest rate differential between Australian bond yields and those of other advanced economies.
Offshore trade in the yuan, meanwhile, has been dominated of late by the strength of the greenback as investors take positions ahead of an expected increase in US interest rates, the first in almost a decade, next week.
Demand to ease
An official economic forecaster in Beijing also said on Monday that demand for iron ore, Australia's biggest single goods export to China, would ease 4.2 per cent next year as steel production is cut by 3.1 per cent.
Mr Juckes argues that the inevitable depreciation of the yuan as the Chinese economy slows will force exporter currencies into another round of competitive devaluations.
He see the Chinese currency depreciating by more than 6 per cent in 2016.
"We expect gradual [yuan] deprecation to take it to 6.8 to the US dollar by end [of] 2016, a move of just over 6 per cent," he said.
"But countries that go from a fixed or managed-peg currency regime to a more free-floating one are at risk of disorderly capital flows and overshoots.
"An overshoot to 7.5 on its way to 6.8 isn't likely but if it happened, would we really be all that surprised?"
Australia and New Zealand Banking group's senior senior foreign exchange strategist Khoon Goh also sees pressure on the yuan as the economy slows and the US tightens monetary policy.
"While we believe there will be increased inflows into China over time as foreign investors increase their exposure, we see downside pressure on [yuan] in the near term," he said.
"Though the Chinese authorities have indicated that they will keep the RMB stable, we believe they will gradually allow the currency to weaken."
