RBA watching China closely

The RBA board minutes (Tuesday) is not expected to have much market impact given the RBA outlined its updated outlook in the Statement on Monetary Policy. The RBA minutes have also been overtaken by events in that they predate the most recent events in China. On that score, the RBA has been cautious so far in reacting to the devaluation of the Chinese currency, but noted that if it supports growth in our largest trading partner then it was "probably good" for Australia. But China accounts for about 6% of Australia's GDP, with Australia the most exposed western country to China due to the trade in commodities. 

"Our economists estimate that a 1pp slowdown in Chinese growth would take: 1) 0.3pp off Australia's growth; 2) 4% off the terms of trade; and 3) 3% off the real exchange rate," notes Barclays.

A depreciating CNY, which could weaken China's demand for imports due to terms of trade changes, could also add to pressures on the AUD over the already slowing investment activity.