FX market growing unrest on the Chinese equity market

Although the Greek issue remains in the centre of attention, the collapse of the Chinese market indicates that a new driver for the currency market is on the horizon. After all, China is currently experiencing more than just the usual correction following a strong increase.

Meanwhile, the government in Beijing has already reacted to this development, trying to support the market through extensive administrative measures. The supervisory authority has now introduced a ban on equity sales over the next six months for shareholders with holdings of more than 5% in a company. 

Moreover, in an attempt to provide a buying incentive, insurance companies have been allowed to hold a greater share of their assets in equities. Of course, state-owned companies have also been ordered to sell their own shares, and considerable funds have been provided for loans to securities firms. 

It is questionable whether these measures will ultimately be enough to support the market. In any case they certainly do come with a bland aftertaste as, ultimately, the government can only fight the symptoms. Moreover, the government's action shows that it is still a long way from allowing a free play of market forces.

In this context, it is above all the potential consequences for the Chinese economy that are relevant for the FX market. The government has been trying to prevent a "hard landing" for some time. If such a risk should rise again, this will be important above all for the AUD which is not only susceptible to higher risk perception. 

China is by far Australia's most important trading partner. The AUD will thus suffer a double blow should fears about China increase further. Of course, this development is unlikely to be inconvenient for the Australian central bank, says Commerzbank. 

While, refraining from cutting interest rates further recently, it did not conceal the fact that it welcomes not only the latest move lower in the AUD (Chart 17) but would even like to see the currency trade lower still.