CNH: Stars are aligning for a recovery
The improvement in China’s activity data remains slow, and overshadowed by the weakness in the property sector. October industrial production grew 4.6% YoY from 4.5% previous and expected while retail sales jumped 7.6% YoY from 5.5% in September. However, property investment underwhelmed once again, coming in at -9.3% YoY YTD vs. -9.1% expected.
However, yuan saw a marked recovery on the back of USD weakness and the efforts by Chinese authorities of continuing with firm fixings despite high USD volatility in the last several weeks have finally brought results. PBoC also did an outsized MLF this morning at CNY1450bn hence, huge net MLF injection of CNY600bn. The net injection was the highest in seven years and could mean a lower chance of an imminent RRR cut, given the authorities do not want to see more pressure on the yuan. There was an unconfirmed news report that China plans to provide CNY1trn of low-cost financing for urban village renovation and affordable housing program, which has cheered up market sentiment.
Biden-Xi talks will be in focus today, with expectations of a conciliatory tone despite strategic differences remaining. This could be further yuan positive. USDCNH closed below 100DMA and traded at sub-7.25 levels in Asia. Next key support at 7.2124, 0.618 retracement.
Market Takeaway: PBOC likely to keep a heavy hand to avoid yuan depreciation, but a recovery back to 7.10 will have to wait for Fed rate cuts to arrive.
Antipodeans: NZD breaks higher, AUD could get another boost from jobs data
High beta currencies responded the most to the peak Fed rate narrative getting further traction. NZDUSD broke back above psychological level and 100DMA at 0.60 while AUDUSD rose to 0.65. China’s liquidity measures also added to the support for the antipodeans, and iron ore prices hit $130 for the first time since March on reports of improving steel demand from China. Upside bias has returned in antipodean currencies and could last until global growth concerns start to weigh.
AUD has also been buoyed by recent RBA rate hike, although the language was dovish. But hawkish commentary could pick up again. Q3 wage price index was reported this morning and came in at 4.0% YoY from 3.6% previously, coming in at the peak of RBA’s forecast. Markets are currently pricing in 50% odds of another RBA rate hike with focus now turning to Thursday’s jobs data.
Market Takeaway: Peak rates narrative could drive AUD and NZD higher until global growth concerns start to weigh. NZDUSD could retest early Oct highs of 0.6056 while AUDUSD faces immediate resistance at 0.6524.