Wednesday, September 24, 2014

Has Alex de Waal got his currency analysis right?

Alex de Waal from TTNQ was on ABC Far North breakfast radio this morning to discuss tourism and the recent fall in the Australian dollar (AUD). He was questioned by Kier Shorey on Chinese tourism and the currency. I wish I had a recording or transcript to review as in reply Alex seemed to indicate that the Chinese Yuan (CNY) was more stable so it wouldn't have the same flow on effect as from the USA or Europe.

I'm not sure this is valid at least on the currency aspect. There are plenty of charts on various timeframes demonstrating the volatility but for a quick comparison update I downloaded the latest daily currency spreadsheet from the RBA. This is the chart for the USD and CNY v 1AUD for 2014:

 
 
These have generally tracked the same patterns which should be expected as the CNY trades within a band around a rate to the USD set by the People's Bank of China. China did allow the CNY to devalue earlier in the year which as usual caused some hyperventilating in the USA. The CNY has since been allowed to appreciate again relative to the USD but is still below the previous high.
 
I looked through the RBA data on the Trade Weighted Index (TWI) which reached a peak this year on July 23 before commencing descent. This is the relative percentage change for significant currencies relative to the AUD since that date:
 
 
 
The largest fall has been against China. This could be cherry-picking and I can select a different date for the recent decline such as September 5/8 when the cracks really started to open but it wont much change the result. Perhaps Alex meant that Chinese tourism may be less sensitive to the exchange rate?
 
The general tendency over the past decade has been for the CNY to appreciate relative to the USD and it has risen significantly over that time. That period has also coincided with the period of a stronger AUD. I may come back and look at that longer term trend relative to tourism and my previous post: Tourism and the exchange rate.
 
Update: I have been able to review the comments and the comments from Alex do seem to be more related to sensitivity to the exchange rate than volatility of the rate itself. Although perhaps some aspects of the response were confusing on this particularly re the Euro. So I will give the benefit of the doubt and return later to exchange rates and tourism. Meanwhile, Conus has questioned the strength of the relationship: How much does a weaker A$ help tourism?


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