The reason behind the poor performance of the Aussie and Kiwi Dollars was China. Since time immemorial the People’s Bank of China (PBOC) has fixed the value of the Chinese Renminbi (Renminbi is the currency and Yuan is the denomination – think Sterling and Pounds) in US Dollar terms. Until ten years ago that meant a fixed exchange rate of 8.27. In 2005 the PBOC revalued the currency by 2% and allowed it to strengthen progressively over the next three years to 6.83, where it remained until 2010. Since then its value has been set on a daily basis by the PBOC, remaining mostly within a ±3% band centred on 6.25 per US Dollar.

Until this week the daily reference rate was decided by the head of the PBOC and his colleagues. On Tuesday they altered the system so that the daily reference rate depends on the previous day’s closing price and market forces. As has been the case for a while, the currency can move no further than 2% from the reference rate.

On the first two days under the new system the Yuan weakened and investors feared the PBOC was embarking on a dangerous course of competitive devaluation. This is when the Aussie and Kiwi Dollar got thumped however, when the Yuan weakened for a third time this morning investors were considerably more relaxed and the Aussie and Kiwi recovered.