Yuan’s high spillover effects on foreign trade and AUD/USD – trade ideas against Asian pairs

For a 1% move in CNY against the currency concerned, the chart shows how much the currency would have to move against USD to keep the overall exchange rate stable in effective terms. The multipliers are a direct reflection of the importance of China and the US in each country's external trade (exports plus imports).

In Australia's case, for example, China is now so dominant a trading partner (26% of total trade-double the proportion of 10 years ago) that AUD/USD "needs" to fall 0.77% for every 1% rise in USD/CNY to keep the overall effective exchange rate stable.

The ratio of the USD spot move to the 3% move in USD/CNY since Tuesday's policy change. Moves in Asian EM have been broadly as we would have expected. In G10, relative moves have also been broadly as expected, although the weaker USD clouds the absolute changes. There are two notable exceptions to this. JPY has failed to weaken in the way that Japan's heavy trade exposure to China would suggest that it should. And EUR and some of its satellites are outright strong, not just outperforming on the crosses. Both of these apparent anomalies, but particularly JPY have the same factor at their roots.

So, on days when the market is digesting another sudden move higher in USD/CNY, the trades that should follow would generally be:

Short AUD against anything, particularly CAD, but also EUR or the other European currencies.

Long CAD against the other commodity currencies. Long EUR/JPY or GBP/JPY, short North Asia (KRW and TWD); long South Asia (INR and IDR) in EM.