Australia, NZ dollars struggle to shake China woes as yuan skids

Australia, NZ dollars struggle to shake China woes as yuan skids

By Wayne Cole

SYDNEY, Aug 22 (Reuters) - The Australian and New Zealand dollars were trying to pick up the pieces on Monday after last week's drubbing as speculators took profits on short positions, though a fresh fall in the yuan seemed to bode ill for both commodity currencies.

The Aussie inched up 0.3% to $0.6897 AUD=D3 , having shed a steep 3.5% last week in its worst performance in almost two years. It did find some support under $0.6870, but risks a re-test of its July trough down at $0.6683.

The kiwi bounced 0.5% to $0.6199 NZD=D3 , but that followed a 4.4% dive last week in the biggest tumble since the onset of the pandemic in March 2020. The loss of support around $0.6215 could see a retreat to at least $0.6150.

Another slide in the yuan CNH=D3 to its lowest since late 2020 at 6.8520 added to the pressure as the Aussie is often sold as a liquid proxy for the Chinese currency, reflecting China's position as the largest buyer of Australian resources.

News that Chinese policymakers had trimmed lending rates was taken as only a minor positive given the depth of the economy's troubles.

"It doesn't move the needle on the economy because of weakening credit demand," said Alvin Tan, a strategist at RBC Capital Markets.

"The exchange rate by contrast likely remains an effective monetary policy instrument, and there is certainly ample room for the trade-weighted renminbi to retrace at least part of its 11% rise over the past two years," he added. "We reiterate the USD/CNY 7.0 target by early 2023."

Global risk aversion combined with the slide in the yuan to overshadow domestic considerations, including last week's half-point rate hike to 3.0% from the Reserve Bank of New Zealand (RBNZ).

The central bank's hawkish outlook was underlined by Deputy Governor Christian Hawkesby who on Monday said policymakers want rates to be "comfortably above neutral" at around 4.0% to help lower core inflation.

Two-year swap rates NZDSM3NB2Y= were up at 4.07%, having climbed 10 basis points last week and markets imply the cash rate (OCR) could get to 4% as early as November. 0#RBZWATCH

"The message was higher yields, and higher for longer," said Ross Weston, a senior portfolio manager at Kiwibank. "According to the RBNZ they are more interested in getting the OCR to 4.00%-ish and watching, waiting, and worrying."
Editing by Jacqueline Wong