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90 seconds at 9 am: China drags yuan lower to boost exports after biggest trade deficit in more than a decade; NZ$ down at 81.7 USc as Fonterra cuts payout; Focus on Fed
Here's my summary of the key news overnight in 90 seconds at 9 am, including news the Peoples Bank of China (PBOC) has moved to push its yuan currency lower by the most in one day since August 2010.
The currency, which is controlled by the central bank within a trading band, has been forced 0.5% lower this year after being allowed to rise 4.7% last year, Bloomberg reports. America and others accuse China of deliberately holding its currency low to benefit its exporters. The New Zealand dollar has risen 12% vs the yuan since November. See the yuan tab in our interactive chart below.
However, China disputes that it is manipulating its currency and has said it is moving to liberalise its currency trade and capital flows to reduce its imbalances. Reuters reported the PBOC saying yesterday it wanted market forces to play a larger role in setting the value of the yuan, but it also said it would use interest rates and the currency to help offset the slowing effects of an export slowdown.
The move lower in the yuan followed the announcement of China's biggest trade deficit in more than a decade in February after export growth was almost half what was expected. Export growth to Europe slumped as the debt raddled region contracted.
How China reacts to the European slowdown is crucial for New Zealand and Australia. Fears that China's own economic slowdown may turn into a hard landing rather than a soft landing have hit commodity prices in recent weeks. China massively stimulated its economy in late 2008 in response to the Lehman crisis, boosting prices of commodites such as iron ore, coal and milk powder. This in turn cushioned the impact of the Global Financial Crisis for Australia and New Zealand.
However, this time around China has less flexibility to massively stimulate its economy, given inflation has risen and local governments are awash with debt. House prices have also risen sharply and are now starting to fall.
Commodity prices fell overnight on worries about China's slowdown, with gold, copper and oil falling as much as 1%.
The New Zealand dollar has also had a weaker tone over the last day on these concerns about commodity prices. It was around 81.7 USc in morning trade, down from over 82 USc late last week. Fonterra's announcement yesterday of a fall in its forecast payout of 15 cents/kg or about NZ$250 million in payouts was also a factor. See more here from Alex Tarrant.
Meanwhile, US stocks and European stocks were broadly steady overnight. Markets are waiting for signals from the US Federal Reserve tomorrow morning (NZ Time) after its key Federal Open Markets Committee meeting about whether it carries out a third round of quantitative easing or money printing.