Dollar and markets shudder over Chinese fears
The fall came as more than $21 billion was wiped from the local sharemarket, which shed 1.5 per cent for the second-biggest fall of the year on the back of a large and unexpected sell-off on the Chinese sharemarket.
The benchmark S&P/ASX 200 Index lost 75.6 points to 5010.5.
The surprise drop in both the dollar and the sharemarket on the eve of Tuesday's Reserve Bank board meeting left some traders millions of dollars out of position.
The dollar fell from US102¢ to US101.16¢, the lowest it has been since July last year, in response to an announcement by China's central bank that it was clamping down on speculative property investment. Stocks in China suffered heavy losses as investors feared a potential slowdown in the world's second-largest economy.
This news hit an already weakened dollar, which has shed 4¢ since late January in the face of a resurgent greenback.
Now strategists say the dollar could be heading lower after it surprised everybody by breaking through a key support level of US101.50¢ on Monday.
"It's safe to say the whole market underestimated how seriously the Chinese market would take the rules," Westpac senior strategist Sean Callow said.
"A lot of us assumed that today was not the day to break through US101.50¢ because Tuesday's the exciting day right?
"We've got the RBA and retail sales, and then GDP on Wednesday, so you would think that Monday would just be a quiet day. But I think the market's been caught napping a bit," he said.
Financial markets' expectations of a Reserve Bank rate cut dropped to 13 per cent following the release of the data, from a forecast of 17 per cent, the lowest since the RBA last met on February 5.
The markets are pricing in two 25 basis points of cuts this year.
Rochford Capital director of market risk Derek Mumford said the overall downward pressure on the Australian dollar would be welcomed by the Reserve Bank. ‘‘The fact that the [Australian dollar] is coming off, going by their recent comments, reduces the chances of further rate cuts,’’ he said.
‘‘I do think the RBA considers that rates are at very low levels historically. The RBA won’t be rushing into any unnecessary cuts at this stage.’’
Last week, a better-than expected forecast of 2013-14 private new capital expenditure, coupled with a lift in new home sales, also eased pressure on the RBA.
The Reserve was likely to look through the mixed set of economic data released on Monday and keep interest rates on hold at its board meeting, economists said.
Data on Monday showed job advertisements rose in February for the second month, while a TD Securities inflation gauge remained flat for the same month.
But private sector housing construction remained weak in January, as company gross operating profits fell 1 per cent for the December quarter.
Frequently Asked Questions about this Article…
The Australian dollar plunged after a global sell-off triggered by China’s central bank announcing a clampdown on speculative property investment. That surprise policy move knocked Chinese stocks sharply lower and hit risk currencies like the AUD, which fell from about US102¢ to US101.16¢.
The local sharemarket lost more than $21 billion in market value and the S&P/ASX 200 fell 75.6 points to 5,010.5, a 1.5% decline — the second-biggest drop of the year — driven largely by the unexpected sell-off in China.
Yes. The AUD surprised many by breaking through the technical support level of US101.50¢. Breaking that support increases the likelihood of further downside pressure, according to strategists, and can trigger stop-losses and faster moves as traders adjust positions.
After the market move and data releases, expectations of an imminent RBA rate cut fell — the probability of a cut dropped to about 13% from 17%. Markets are still pricing in a total of two 25 basis-point cuts this year, but economists say the RBA is likely to look through mixed data and hold rates at its meeting.
Mixed data arrived: job advertisements rose in February and a TD Securities inflation gauge was flat, while private sector housing construction remained weak and company gross operating profits fell 1% in the December quarter. A better-than-expected forecast for 2013–14 private new capital expenditure and stronger new home sales also eased pressure on the RBA.
China is the world’s second-largest economy, so policy moves that target speculative property can trigger sharp losses in Chinese stocks and spill over into global markets. For Australian investors that can mean currency weakness, weaker local sharemarkets and heightened volatility, especially for assets linked to China.
The surprise timing of the sell-off — just before a scheduled RBA meeting and other economic releases — left some traders millions of dollars out of position. Strategists said the market had been 'caught napping,' highlighting how quickly liquidity and positions can be disrupted by unexpected news.
Stay calm and avoid knee-jerk decisions. Review your portfolio’s exposure to currency risk and China-linked assets, check whether your holdings match your risk tolerance and time horizon, and expect higher volatility around major data and central bank events. If unsure, consider seeking personalised advice rather than reacting to short-term market moves.
Call 1300 880 160
Start a chat
Schedule a call
