NZ dollar edges lower as investors digest Chinese devaluation

The kiwi dropped as low as 65.50 US cents, from 66.27 cents at 1pm, and was recently trading at 65.60 cents. Photo / NZME.

The New Zealand dollar edged lower in Northern Hemisphere trading as investors weigh the impact of China's currency devaluation yesterday, fuelling concerns about the world's second biggest economy and the ripple effects on its trading partners.

The kiwi decreased to 65.42 US cents at 8am in Wellington from 65.52 cents yesterday, having shed more than half a cent after the People's Bank of China acted.

The local currency traded at 4.1303 yuan from 4.1396 yuan yesterday, having jumped from 4.1033 yuan the day earlier.

The Australian and New Zealand dollars dropped sharply after China's central bank set the midpoint for the yuan at 6.2298 per dollar, down from the previous day's fix of 6.1162 per dollar, and said it was aiming for 2 per cent depreciation.

China is New Zealand's biggest trading partner, and second biggest export destination behind Australia, meaning a weaker yuan will crimp export receipts in the world's most populous nation.

"So surely, but slowly these structural changes in China's financial liberalisation have clear implications for New Zealand's financial variables, asset prices and demand for our exports and tourism sectors," ANZ Bank New Zealand agri economist Con Williams and senior FX strategist Sam Tuck said in a note.

"Markets sold NZD on the view that the devaluation reflects a weaker Chinese economy and reduces Chinese purchasing power. The path of the RMB is now vital for the NZD."

The devaluation of the yuan eroded investors' appetite for riskier assets, prompting a selloff in equity markets in Europe and the US, and also pushed commodity prices lower, which further weighed on the kiwi dollar.

The local currency traded at 89.50 Australian cents form 89.44 cents yesterday, and increased to 81.82 yen from 81.68 yen. It fell to 59.22 euro cents form 59.67 cents yesterday, and was little changed at 41.97 British pence form 42.07 pence.

The trade-weighted index was little changed at 70.28 from70.32 yesterday.