Currencies

These are the currencies most vulnerable to China's economic slowdown

Key Points
  • Experts say that two currencies stand out as being the most exposed to China: the Australian dollar and the New Zealand dollar.
  • That's because China is the biggest trading partner to both commodity-producing countries.
  • Flattening demand from China — the world's top consumer of iron ore — is also set to weigh on Australia, the world's top iron ore exporter.
  • Other currencies that are under pressure from Chinese economic concerns would include the Canadian dollar, Malaysian ringgit, Indonesian rupiah, and Singapore dollar.
A handful of Australian hundred dollar bills.
Louise Kennerley | Fairfax Media | Getty Images

Amid worries over China's economy, some currencies — particularly those of commodity-producing countries — will be most vulnerable to its slowdown.

Experts say that two currencies stand out as being the most exposed to China: the and the New Zealand dollar.

China is the biggest trading partner of both countries, with 24.9 percent of New Zealand's exports and about a third of Australian exports going to the Asian giant.

Flattening demand from China — the world's top consumer of iron ore — is also set to weigh on Australia, the world's largest iron ore exporter.

"We expect the largest falls to occur in the Australian and New Zealand dollars. This is due to their exposure to China's economy, which we forecast to continue to slow, and in the case of the Australian dollar to its reliance on exports of iron ore and coal, which we think will be among the worst performing commodities this year," research firm Capital Economics said in a report.

The weakness in both currencies will persist for the whole of this year, the firm predicted.

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It expects that further weakness in China's economy will lead to lower demand for commodities, and accordingly, commodity prices. More subdued global growth will also contribute to lower commodity trade volumes, said the research firm.

When commodity prices decline, the amount of money paid for that country's exports also goes down — leading to a depreciation of its currency, and vice versa.

Growth in the world's second-largest economy cooled to 6.6 percent last year— the slowest in 28 years — from 6.8 percent in 2017.

Despite recently announced stimulus, concerns over China's cooling economy are set to persist, as the country reported much weaker than expected trade data last week.

Currencies at risk

The Canadian dollar is another commodity-linked currency that could also come under pressure, said Jameel Ahmad, global head of currency strategy and market research at foreign exchange broker FXTM.

"In a hypothetical scenario where oil hits the floor on fears of reduced demand from China, then other commodity-linked currencies that are at risk to feeling the brunt of the pressure include the Canadian Dollar and even the Russian Ruble," he told CNBC in an email.

Asian currencies that could be susceptible to Chinese economic concerns would include the , Indonesian rupiah and , Ahmad said.

Both the Canadian dollar and the New Zealand dollar were one of the worst performing G-10 currencies in 2018, brought down by sharply falling commodity prices. That's "not surprising given how reliant those countries are on exports of food, energy and metals," said Capital Economics.

These currencies will remain vulnerable to sudden shifts in direction for as long as the political landscape in the global context remains subject to sudden changes.
Jameel Ahmad
global head of currency strategy at FXTM

The Australian dollar has also been hit hard this year, pummeled by twin concerns of its own economy and that of China.

It has been on a downward spiral since 2018, going from levels as high as $0.7918 last February, to around the $0.70 level this week.

That slide was compounded by a February report that China had placed bans on Australian coal imports at a major port. Market speculation suggests Thursday's report may be a reflection of strains in the political and trade relationship between Australia and China in recent times.

Last year, Australia banned Chinese telecommunication companies Huawei and ZTE from selling 5G technology equipment in the country, citing national security concerns.

The weakening Australian dollar "appears to have reflected concerns about China's growth and increased protectionism," said Capital Economics.

That currency is most at risk among commodity-linked currencies, as it follows the "general trend of global risk appetite" more than its domestic economy, Ahmad said.

Only a trade deal between the U.S. and China — who have been embroiled in a tariff battle since 2018 — could save those at-risk currencies, experts said.

"Admittedly, a trade deal between China and the US could give the Australian and New Zealand dollars a lift ... Nonetheless, we think that any further rally would prove short-lived and be overshadowed by the economic slowdown in China," said Capital Economics.

Ahmad added: "In terms of potential catalysts to watch out for and what holds the keys to triggering a potential rally in these currencies, if I had to pick one it would be the removal of US-China trade tensions."

"These currencies will remain vulnerable to sudden shifts in direction for as long as the political landscape in the global context remains subject to sudden changes," Ahmad noted.