China pulls the plug, Oil hit hard and the Aussie takes a beating

The big news of the domestic session is China shutting its stock market after plummeting into ‘limit down’ territory. Essentially this means the market’s fallen too much (more than 5%) and the market has shut for 15 minutes. After re-opening the lower most limit of 7% was breached and markets subsequently closed for the day. From what I can decipher markets will open as normal again tomorrow, but not before the PBoC and the CFFE get stuck into stemming the rout somehow and perhaps find the source of the extraordinary selling.

This is of course not good news for the local unit. The Australian dollar has entered its fourth consecutive day of losses, sinking below 71-figure in the US trading sessions and now eyeing 70 US cents. Broadly speaking, Chinese concerns and losses across commodity markets have prompted a general lean towards the Greenback and Yen – which is a good indication that the appetite of market participants have little tolerance for risk assets. The Yen’s the ultimate winner with the USDJPY pair falling below the 118-figure.

The Aussie and Kiwi are getting smashed across the board, but not more than against the Yen which is of course the preferred currency in times of adversity.

Aussie slides – AUDUSD Chart by MT4

There’s been much talk in the press recently about the falling Yuan, known as the Renminbi or RMB (CNY). While the PBoC have the capacity to set the daily trading range for the (onshore) Yuan, lower limits continue to be breached, forcing the hand of China’s Central Bank to continue to lower the daily trading range. Meanwhile, the offshore RMB (CNH), which trades in major hubs such as Hong Kong, London, Singapore among other locations, is trading at a (growing) discount to the onshore price. This discrepancy could be seen as a reflection of lower confidence in the region, notwithstanding the PBoC’s efforts to control the depth and ferocity of the decline.

To provide a little background, in recent years China has been taking active steps to internationalise their currency by establishing offshore trading hubs. The internalisation of the RMB (by introducing external, offshore trading hub) provides China a greater capacity to deal in its own currency with the rest of the globe, rather than settle transactions in US dollars or other currencies.

The below chart represents the performance of the CNY (onshore) against the CNH (offshore) over the last 12-months. As we can see, since Oct/Nov there’s been a material rise in value.

CNY/CNH – Chart by Bloomberg

Perhaps a better way of looking at it is by overlaying price action. As we can see below, the CNH is trading at a (growing) discount.

CNY & CNH – Chart by Bloomberg