China Covid curb hope – is an easing a boost for risk-on currencies?

November 4, 2022

0 3 minutes read

Shanghai ferry passengers, 7 June 2022 — Passengers cross the Huangpu River on a ferry in Shanghai; is China closer to relaxing on Covid, finally? – Photo: Getty

Chinese whispers are increasing: is Beijing planning to relax some Covid restrictions? CNH, AUD and NZD all picked up on Friday though the rumor mill optimism could be premature.

That hadn’t stopped some stock indices rising sharply; earlier this week the Hang Seng surged more than 5%. Viraj Patel of Vanda Research says there’s no smoke without fire – but the timing will see some fraying.

Is a Chinese President Xi meet with German Chancellor Scholz a risk-on AUD boost?

Risk on the re-bound?

“It’s [relaxation of rules] generally expected first quarter next year and it [rumours] probably has helped on the margin, allowing for markets to start re-pricing it in as a material prospect.

“It does make a case for buying Aussie. It’s one of the biggest shorts right now. But does it make the case for the dollar [turning point], that it might have topped out a bit?”

Possibly but Patel says there’s large forces, deeply embedded, that the Fed is still battling, namely inflation. But Chinese authorities have been under extreme pressure to relax the regs and rumours that relaxation measures are being plotted may be a ‘soft put’.

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No post-Covid buying manual

USD/CNH has fallen from 7.325 on 1 Nov to 7.1822 today; The People’s Bank of China (PBOC) has repeatedly warned against betting on the yuan.

“Do not bet on a one-sided appreciation or deprecation of the renminbi exchange rate,” PBCO authorities are reported to have said, 26 October. Marc Chandler of Bannockburn Global Forex says the PBOC has been hiking the dollar’s reference rate for six consecutive sessions.

“The dollar is allowed to rise by a maximum of 2% above the fix, so this means that the dollar’s cap has been moving higher.”
“At the same time, officials are gradually narrowing the gap between the fix and market expectations.”
That gap reached 950 pips on 20 October amid the Party Congress he says, narrowing to less than 600 pips today.

Commodities have lifted with iron ore futures up today, not to mention some China-sensitive stocks like Rio Tinto and LVMH.

And today, adding to a measure of sentiment positivity, President Xi Jinping met German Chancellor Scholz. This is significant: Scholz is the first G7 leader to visit China since the start of the pandemic in 2020.

USD stall – temporary?

But sentiment is still hampered by Xi’s reshuffle of his politburo and consequent tighter grasp on the country, jeopardizing market-friendly policies says Trading Economics.

AUD/USD has benefited from some stalling from DXY and some more market-positive sentiment on the equities side. But the downside for DXY remains limited given the spreading downturn anxiety.

Fed Chair Jerome Powell made it clear midweek that the rate-hiring cycle was some distance from pausing.

Going lower down under

Meanwhile the Reserve Bank of Australia has upgraded its inflation outlook and trimmed growth forecasts. The RBA’s trimmed mean is now predicted to hit 6.5% by year end, up from 6%, before falling to 3.75% by the end of next year.

This year’s growth projection is clipped to 3% from 3.25% with growth snipped to 1.5% in 2023 and 2024.

Fx Strategist And Finance Consultant at Keirstone, Francis Fabrizi said traders are more optimistic on China re-opening though the AUD/NZD pair, specifically, is still in bearish mode “and the pullback we are seeing could be sellers taking profits and looking for a new opportunities to sell once again”.

“I believe we will see further downward momentum in the coming weeks.”

NFP – limited reaction?

But the market-moving major news today remains US jobs. Markets are anticipating 200,000 non-farm roles to have been added in October.

“Market impact this year has tended to be that the dollar strengthens if the number of jobs added beats expectations, and the opposite happens should we miss expectations” says Equals Money market strategist Thanim Islam.

“Average earnings month-on-month are expected to come in at 0.4% – a higher print will support the Fed’s calls from Friday, adding to dollar strength.”

Next week sees China and Taiwan release trade data. “We expect both to report slower export growth with Taiwan possibly even posting a contraction,” says ING. “Import growth should however slow even faster than exports resulting in larger trade surpluses, which would help GDP growth.”

Shortly after midday DXY was 0.47% down at 112.13 while GBP/USD had staged a modest fightback, up 0.48% to 1.1203; EUR/USD was 0.46% higher at 0.9792; USD/JPY was 0.36% down at 147.77.