China Slump Breaks Aussie’s Back as S&P Spurs Slide to 2009 Lows

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The Australian dollar slumped to the weakest level in six years as a gauge of Chinese manufacturing unexpectedly worsened and Standard & Poor’s said it might lower Australia’s credit rating if the budget doesn’t improve.

The Aussie fell against all its 31 major counterparts as Caixin Media and Markit Economics said their flash manufacturing index for China dropped to the lowest in 15 months. China is Australia’s major trading partner. ABN Amro Bank NV, the most accurate Aussie forecaster in Bloomberg Rankings last quarter, lowered its 2015 and 2016 year-end estimates for the currency.

China’s numbers “were very weak,” said Roy Teo, a currency strategist at ABN Amro in Singapore. “Everything looks bearish at the moment.”

Australia’s currency tumbled 0.8 percent to 72.93 U.S. cents as of 7:22 a.m. in London after sliding to 72.69, the lowest since May 2009. The New Zealand dollar dropped 0.2 percent to 65.95 cents.

ABN Amro cut its end-December forecast for the Aussie to 70 cents from 72, and trimmed its estimate for 2016 to 64 cents from 66 cents. The currency will weaken to 72 cents by Dec. 31, according the median estimate of more than 50 analysts surveyed by Bloomberg.

Policy makers in both Australia and New Zealand are likely to cut interest rates in September to bolster flagging growth as weakening Chinese demand weighs on commodity prices, Teo said.

Gridlock Concern

S&P in a statement Friday affirmed its AAA ranking on Australia but said parliamentary gridlock on the budget or an external shock may lead it to lower its rating.

Swaps traders see 24 basis points in rate cuts by the Reserve Bank of Australia over the next 12 months, and 40 basis points by its New Zealand counterpart, data compiled by Bloomberg show.

Prices for iron ore, Australia’s biggest export, have dropped almost 50 percent in the past year, outpacing the 36 percent decline in dairy, New Zealand’s key commodity.

The preliminary Purchasing Managers’ Index from Caixin Media and Markit Economics slid to 48.2 for July from 49.4 the previous month. The median estimate in a Bloomberg survey was for an increase to 49.7. Numbers below 50 indicate contraction.

“Anything that suggests we aren’t really seeing signs of a recovery in China adds a bit of weight on Aussie,” said Robert Rennie, the global head of currency and commodity strategy at Westpac Banking Corp. in Sydney. Risks of a drop for the Australian dollar toward 70 U.S. cents are building, he said.

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