Aussie drops 1% as China's record yuan cut fractures confidence

[SYDNEY] The Australian and New Zealand dollars tumbled after China, the South Pacific nations' key trading partner, cut the yuan reference rate by the most on record.

The Aussie and the kiwi are each down more than 10 per cent this year against the greenback as weakening Chinese demand drives down prices for the commodity exports on which the Antipodean nations' economies depend. China's central bank weakened its daily reference rate for the yuan on Tuesday by a record 1.9 per cent amid signs of a deepening slowdown in the world's second-largest economy.

"It implies the relative lack of confidence in the Chinese economy," said Thomas Averill, a managing director in Sydney at Rochford Capital, a currency and rates risk-management company. "It's more Aussie dollar and kiwi dollar weakness, rather than US dollar strength." The Aussie plunged 1 per cent to 73.39 US cents as of 11 am in Tokyo, while the New Zealand currency weakened 0.9 per cent to 65.58 US cents. The Australian dollar was set for its biggest daily drop since July 24.

The greenback strengthened against all its 16 major counterparts, data compiled by Bloomberg show.

"There have been some expectations since yesterday about some sort of stimulus following bad numbers over the weekend from China," said Yuji Saito, executive director of foreign exchange at Credit Agricole SA in Tokyo. "The news was used to spur dollar buying." The euro declined 0.3 per cent to US$1.0982, reversing an earlier gain of 0.1 per cent that had come amid optimism Greece and its creditors were closer to an agreement on a third bailout.

BLOOMBERG