FxWirePro: G10 Currency radar – Antipodean captivated, as they are still highly correlated CNY devaluation

Among G10 FX segment, the antipodean remain highly vulnerable as Aussie dollar has fragile, it would be the worst affected by a 14% yuan depreciation against the USD from three channels - negative global risk sentiment, falling hard commodity prices and direct negative contagion on the currency.

The AUD has indeed found itself becoming more correlated to the CNY since mid-2015, when the Chinese equity market started to slide. The AUD/USD exchange rate will likely retest the low of 0.60 from the 2008 financial crisis on the scenario. Real fun for AUD bears: If the RBA were to cut rates in response to the financial shock, then further downside in AUD/USD towards 0.55 would occur.

The Kiwi dollar would also be dented in this Chinese crisis. New Zealand has the second-largest export exposure to China among the G10, and the currency would also be hurt by negative global risk sentiment, given the country's persistent current account deficit, now at 3.3% of GDP. Assuming that AUD/NZD falls to roughly 1.0 on the CNY devaluation scenario, that would imply that the NZD/USD should slide to 0.55-0.60 at the same time.

Amongst other G10 currency turmoil that would suffer significantly is the Canadian dollar, given its close connection to crude oil prices in particular. Assuming a drop in crude oil prices of 5.5%, USD/CAD is likely to rise to the 1.50-1.55 range. Canadian direct economic connection with China is quite lesser than Australia's.

Sterling is exposed too although much lesser than others but the sterling could fall under further pressure because of the exposure of major UK-based banks to Asia, coupled with the threat from the large current account deficit at a time of global economic and financial stress. But sterling should hold up better than the AUD and CAD.

Projections and Recommendations: Go short in AUD/USD as it would likely to retest the 2008 lows or even below of 0.60 (0.59) provided the USD/CNY jumps to 7.50. The NZD and CAD also are the main losers, as commodity prices slide.

On the flip side, the traditional safe haven JPY is expected to outperform. Japanese policymakers however may intervene verbally to keep the USD/JPY rate above 110. The CHF and EUR also win versus the USD, but the gains are likely to be capped (max 5-6%) by proactive SNB and ECB policies.

Short AUD/CAD (or even NZD/CAD) is a good relative value trade in this scenario as it has much lower directionality than AUD/USD and is less correlated to broader global risk sentiment.