The Australian dollar has dropped sharply in response to an unexpected repricing of China’s currency by its central bank.

The People’s Bank of China (PBOC) surprised markets with a 1.9 per cent cut to the value of the yuan against the US dollar.

The Australian dollar dropped almost a cent in response to the move, down to 73.2 US cents by 12:52pm (AEST).

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The local currency was 0.4 per cent stronger against the yuan at 4.62.

Currency analysts expect it to continue to fall throughout the session.

“Given this development, we can look for US dollar strength regionally against other currencies. This is practically an implied devaluation of the Yuan,” Oanda senior dealer Stephen Innes.

The PBOC said the move is an effort to combat slumping exports.

Recent data has revealed China’s overseas shipments fell 8.3 per cent in the year to July, which was much worse that the 1.5 per cent decline that was expected.

The PBOC said it believes it had to act now to combat the challenges of a strong currency, which it says in not in line with expectations.

“It is a good time to improve quotation of the RMB (renminbi) central parity to make it more consistent with the needs of market development,” it argued.

Westpac’s economics team agrees, saying the currency was too high and lowering it is in China’s best interests.

“As of June, China’s real effective exchange rate was up 14 per cent from a year ago. That was clearly inappropriate then, and it is doubly so with the trend of deteriorating export performance codified in the July trade report,” the bank’s analysts wrote in a note.

“With inflation pressures absent – indeed, the strong currency had been contributing to a deepening deflationary impulse in certain segments of the economy – there seemed no economic reason to stubbornly hang on to a stable bilateral exchange rate with the strengthening US dollar.”

The People’s Bank says the repricing of the yuan is just a one-off event, but it will continue with reform of the currency market.

The opening-up of the foreign exchange market, extending trading hours, introducing qualified foreign institutions and promoting the formation of a single exchange rate in both onshore and offshore markets will continue to be targeted by the central bank.