Finance Finance News Global drama may help economy

Global drama may help economy

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Recent bad economic news from Greece and China might mean the Reserve Bank and the sluggish Australian economy will finally get their wish of a lower exchange rate.

The Chinese stock market has been in turmoil in the past three weeks, losing almost 40 per cent, or over $US3 trillion ($A4 trillion) in value.

Meanwhile, in Europe, the game of brinksmanship between cash strapped Greece and its creditors continues.

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All this uncertainty pushed sharemarkets lower earlier in the week and the Australian dollar fell to a six-year lows of 73.92 US cents.

It also touched a one-and-a-half-year low against the Japanese yen and a six-year-low against the British pound.

There was a bit of a recovery later in the week after Chinese regulators barred major shareholders and executives of listed companies from selling their shares for the next six months.

China’s benchmark Shanghai stock index responded and made five to six per cent gains on Thursday and Friday and the Aussie was trading higher, a bit below 75 US cents.

However, BK Asset Management FX Strategy managing director Kathy Lien said the falls in the Chinese share market aren’t over.

“While China is committed to stopping the declining, they are fighting market forces and valuation,” she said.

“The sell-off in stocks has been sharp and aggressive but they bring valuations back to reasonable levels.”

Ms Lien said a large fall in the Chinese share market is a big risk for other financial markets because of the blow to confidence – China being the world’s second largest national economy.

RBA governor Glenn Stevens has been growing impatient about the persistently high Aussie dollar, and has long said that needs to be lower against a basket of currencies to help boost the local economy.

A lower exchange rate makes it easier for local exporters to sell their goods and services to foreign buyers, and makes locally produced goods and services more competitive with imports.

Westpac chief currency strategist Robert Rennie, like many, expects the Aussie to fall as low as 73 US cents by September and 72 cents by December.

He said the Aussie will be weighed down by rising concerns about the Chinese outlook, caution in markets because of Greece, weaker iron ore prices, and expectation of an interest rate rise by the US central bank.

“Clearly, weakness in commodity and equity prices in China are very much front of mind right now,” he said.

“However, we still think that Greece is more of a negative than markets are currently pricing too.”


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