Dollar drops vs. greenback, gains vs, yuan after Bank of China devalues currency

The New Zealand dollar fell after China devalued the yuan, stoking concern economic growth is weaker than expected in the nation's biggest trading partner.

The kiwi traded at 65.52 US cents as at 5pm in Wellington, down from 66.10 cents late yesterday. The currency rose to 4.1396 yuan from 4.1033 yuan.

China is the biggest two-way trading partner with New Zealand and the second-largest export market after Australia, which in turn counts China as its biggest market. That leaves both the kiwi and the Aussie vulnerable to any downturn in China's economic growth and demand for raw materials ranging from milk powder to iron ore and coking coal. The People's Bank of China set the midpoint for the yuan at 6.2298 per dollar, down from the previous day's fix of 6.1162 per dollar, and said it was aiming for 2 percent depreciation.

"It's consistent with the Chinese economy being weak and that's bad for the New Zealand economy because we depend on them for a big chunk of exports," said Imre Sperizer, currency strategist at Westpac Banking Corp. "And the 2 percent devaluation today - is that the end of the story? The market believes this may be the beginning of many more to come" and could lead to a "devaluation race" among a group of currencies including the kiwi and the Aussie.

Westpac is projecting that the New Zealand dollar will fall as low as 62 US cents this year.

China's move comes after weaker Chinese trade and manufacturing data was released at the weekend, raising concern about an economic slowdown.

"They are trying to bolster their economy and the easiest way of doing it is by making it better for their exporters and make themselves more competitive again globally," said Tim Kelleher, head of institutional FX sales New Zealand at ASB Bank.

"It's more monetary easing in Asia, theoretically it will decrease our competitiveness as well." Kelleher said. "If all the countries are easing their monetary policy then it puts further pressure on the RBNZ to ease as well."

The New Zealand dollar increased against the Australian dollar, reflecting the Australian economy's bigger exposure to China, Kelleher said.

The kiwi recently traded at 89.44 Australian cents, from 89.29 cents late yesterday. The local currency fell to 59.67 euro cents from 60.23 cents, and declined to 42.07 British pence from 42.67 pence yesterday. It fell to 81.68 yen from 82.22 yen.

The trade-weighted index slipped to 70.32 from 70.45.

The two-year swap rate was little changed at 2.86 percent and five-year swaps rose about 3 basis points to 3.16 percent.

(BusinessDesk)