BEIJING: A surprise cut to China’s tightly managed exchange rate has seen the Australian dollar drop, but it might not have the effect exporters might wish for.
The People’s Bank of China dropped its official exchange rate by 1.9 per cent yesterday, which saw a rise in the US dollar and a falls across many Asian currencies, including Australia’s.
While exporters usually benefit from depreciation of the Australian currency, the nature of this drop may not bring the usual competitive benefits for Australia’s agricultural sector.
“The other impact the yuan’s depreciation has had is to lower US dollar prices for commodities,” said Commonwealth Bank agri-commodities strategist Tobin Gorey.
“So there is little net benefit for Australian farm exporters. You’ve lost a bit on the global price, but you’ve gained some on the currency.”
Given the state of the Chinese economy, Mr Gorey said the probability of another cut to the exchange rate over the longer term could not be ruled out.
“It probably reinforces our own view that the Australian dollar will drop further this year. We’re looking at down around 70 cents at the moment, by the year’s end,” he said.
“The other one as well is that the US dollar can’t go sideways or down in this context. It’s probably going to go up, which weighs on US dollar agri-commodity prices,
“So you’re getting swings and roundabouts there.”
Mr Gorey also pointed out that if China further devalued its currency, then the cost of exports could make local product more attractive to Chinese consumers.
Hannah Janson, a commodities analyst with Profarmer, said the cheaper Chinese currency would make imported Australian feed grain products more expensive, compared to the local grain.
“It definitely has the potential to widen the price spread between Chinese domestic feed grains, particularly corn, and imported Australian product, which could be enough to make some Chinese consumers switch the source of their feed grains,” she said.
