We have speculated over the last couple of days that the CNY boost could be a move by China to pull the currency well away from its assumed floor (7.00 in USDCNY terms) ahead of a meeting with Trump at the G20 meeting at the end of this month. This was already lifting global market sentiment and boosting Asian FX before Trump poured fuel on the situation by supposedly ordering a draft proposal for a US-China trade deal.
No need for details just yet, apparently, or why the sudden change of heart and ongoing lack of any active negotiations. We would strongly suggest that this is nothing more than theatre designed to boost the market ahead of next Tuesday’s mid-term elections. Still, the market was not positioned for this nor China. This is most evident in the G10 FX in the surging AUD.
Yesterday’s Bank of England meeting triggered a powerful rally in sterling, as governor Mark Carney made it clear that he is ready to hike rates under any scenario – also a hard Brexit, due to the risk of a supply side shock. I am a bit surprised that the focus is on the supply and demand and not on defending the currency from an ugly adjustment. Regardless, the promise reduces the “hard Brexit discount” and is sterling supportive, just as the recent budget announcement and the shift away from austerity is strongly sterling supportive. As well, Carney underlined that in a smooth Brexit scenario, the economy is already running hot – a heat that will only get hotter with fiscal relief.
The strong bounceback in global equities is mostly linked to the hopes that the US and China can steer clear of a further escalation in the trade policy showdown. The US treasury market shows that the relief rally only allows a fresh slide in bonds and rise in US yields – ironically a factor that will eventually act against the surge in risk appetite.
That takes us to the most important economic calendar even of the week – today’s US October Average Hourly Earnings, which is already expected to surge to a new high for the cycle at 3.1% year-on-year. A disappointment could fan the flames of the USD correction, while an upside surprise surely revives Fed expectations for a December move and subsequent rate hikes. The December rate hike odds dropped as low as 65% during the recent equity market slump.
AUD is leading the charge in pricing in the enthusiasm for a US-China trade relation thaw and a stronger CNY. The first test for the pair is today’s US jobs report and whether a strong surge in earnings that is expected (or even upside surprise) powers a fresh rise in US yields and offers support for the US dollar, or if the focus remains on the prior factors supporting AUD and other Asian (and really global) FX versus the USD. The move has cleared the falling channel and if this extends, the 0.382 Fibo retracement near 0.7450 could become a focus – also as a previous area of interest and where the 200-day moving average is about to converge. This does not shift our longer term outlook for a weaker AUD.