In a surprise decision last week, China began sharply devaluing its currency, the RenMinBi. While the plunge paused on Friday, the RMB was still down 4.4 percent against the US dollar for the week, a huge drop for China.
The sudden devaluation of the RMB is a result of the fact that the Chinese economy is slowing. Western economists, some of whom believe the RMB is 10% over-valued, are now waiting to see if China will continue to push its currency down further. The Chinese People's Bank says the repricing is just a one-off event, but that it will continue with reform of the currency market.
In the USA, the Fed has been thinking about raising interest rates, perhaps as early as next month - for the first time in more than nine years - but now faces a dilemma as a rate increase could drive the US dollar up even more against other currencies. What happens to the Australian dollar for the remainder of 2015 will largely depend on what happens in both China and the USA.
If your business relies on trade with China, whether it is import or export, you will naturally want to be watching developments very closely in the coming days and weeks. If you are concerned about currency fluctuations, talk to your financial institution now about ways to minimise the impact, such as buying foreign currency or pegging forward exchange rates. Don’t forget that you can pay for imports in RMB and do not need to conduct all transactions in US dollars.