Investors uneasy over China’s economy are now less anxious over the yuan, with USD/CNY not moving more than 0.25% over the day since 12 Aug. But the scale of the falls in Chinese stocks has been hard to ignore. The Chinese central bank’s announcement of monetary easing steps on a Tuesday (usually near the weekend) reinforced the view that China’s share slide was indeed a serious concern. But developed market stocks have begun to recoup gains and are likely to lose interest in China shares so long as they are not collapsing each day. Indeed China’s government is likely to pull out all the stops this week to prevent China’s markets from being a distraction from the World War 2 commemorations, for which special public holidays will close markets on Thu and Fri.Commodities are becoming a little more positive for the Aussie, with spot iron ore rebounding to $56/tonne on Friday. This allows increased focus on a crowded local calendar. Westpac looks for a moderate 0.4% q/q, 2.2% y/y gain in GDP on Wednesday, not a great outcome but likely to be expected by the RBA as it hopes for a stronger 2016. We look for a steady tone in the RBA statement on Tue, which should help shore up AUD somewhat.
Internationally, if Chinese markets are quieter this week as we expect, the focus will turn increasingly to the US economy, with the Aug employment report of course key. Fed officials at the annual Jackson Hole conference were cautious but left the door open to the Sep rate rise Westpac still predicts. But markets are only pricing a 25% chance of such a move so a firmer USD should help cap AUD/USD over the week. Ranges have probably shifted from 0.7250-0.7450 to 0.7050-0.7250