AUD, other Asian FX bid on CNY rebound

The AUD has rebounded sharply after the Chinese renminbi posted its strongest session in a couple of weeks after the People's Bank of China set the USDCNY rate lower overnight. Asian FX may be off to the races for the nearest term if the market decides that China will boost its currency for now. Meanwhile, a pivotal US jobs report looms tomorrow.

The US equity rally surge yesterday faded into the close and thus into the end of the month as the attempt at retaking the prior major low remains in doubt. But sentiment was tilted toward positive in Asia, and yesterday’s extension of the USD rally was pushed back across the board as China fixed USDCNY a bit lower after new highs for the cycle were poked at yesterday. USDCNY followed through a bit more to the downside than it has in previous sell-offs and trades in Asia took the ball and ran with it. We are a month away from the Trump/Xi meeting at the G20 in Buenos Aires, providing plenty of leeway for back and forth if China holds the line or even decides to move the CNY a percentage point or two stronger into that meeting. 

Sterling found sudden encouragement from headlines yesterday after UK Brexit secretary Dominic Raab said that he expects a Brexit deal could be finalized by November 21, on the same day that EU officials were downplaying the progress in talks and the FT quoted one EU diplomat saying it was “very unlikely” that the November Brexit summit will go forward unless the UK negotiating position move significantly. For now, we can only say the move looks technically encouraging on the charts for sterling, but the move sets up the need for further confirmation that we are heading toward a Brexit breakthrough and a November summit and a fresh breakdown in talks would likely send sterling right back where it came from.

[Update: Sterling is coming under pressure again as UK officials deny this morning's Times story suggesting that UK banks would be allowed access to the EU post-Brexit.]

The bounce in sterling extended sharply this morning on a story that agreement has been reached for UK banks to retain access to the EU post Brexit. The good news came just in time for GBPUSD, which was headed for a test of sub 1.2700 range lows before the news took the pair all the way back to 1.2900 as of this writing. 

AUDUSD jumped back sharply higher as the Australian trade balance data for September surged much higher into surplus than expected, mostly on a drop in imports, especially capital goods. This does nothing to allay our concerns about the credit cycle turning in Australia, but the short term squeeze potential is certainly there in November if China boosts its currency for the next few weeks and risky assets find good cheer. The AUD is perhaps also gaining a bit of momentum as it has broken higher, or is close to doing so, in several crosses like EURAUD, AUDJPY and AUDCAD. 

Chart: AUDUSD

The Aussie and kiwi are the two most sensitive currencies to CNY moves and the rally in the CNY overnight has inspired across the board strength in AUD, with AUDUSD looking at a new, almost one-month high if it closes near current levels. This is a significant impulse and speculative positioning is the wrong way around here if China decides to give its currency a fillip for the balance of November. The next major area higher looks like 0.7300.