The Australian dollar added more than 0.50% on Tuesday after the PBoC announced it would keep the yuan stable at an equilibrium level. The announcement was made a few hours after the RBA’s monetary policy decision; however, the latter was a non-event as the central bank left interest rate unchanged and made some minor changes to the statement.
Just like Chinese equities, the Australian dollar bore the brunt of the sell-off over the last few weeks as trade tensions escalated. Earlier this morning, the Chinese yuan fell to an 11-month low against the US dollar with USD/CNY hitting 6.7214. Nevertheless, the currency strengthened quickly after the central bank’s comment as USD/CNY eased to 6.6850.
The People’s Bank of China has sent a strong signal. However, it is hard to say whether investors will fight the central bank and push the yuan lower or take note stop short selling the yuan. One has to keep in mind that the PBoC is used to deal with short-sellers and it usually win. For example in January 2017, offshore overnight deposit rates rose to prohibited levels, which squeezed short sellers as funding costs exploded. We are not there yet but now traders know that the PBoC is watching them.
By Arnaud Masset
