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

By Adrian Holliday

12:32, 4 November 2022

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In this article:
AUD/USD
AUD/USD
0.69230 USD
-0.01552 -2.190%
EUR/USD
EUR/USD
1.07944 USD
-0.01164 -1.070%
DXY
US Dollar Index
102.6431 USD
1.248 +1.230%
USD/JPY
USD/JPY
131.218 USD
2.474 +1.920%
NZD/USD
NZD/USD
0.63292 USD
-0.01492 -2.300%

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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.

GBP/JPY

158.15 Price
+0.500% 1D Chg, %
Long position overnight fee 0.0000%
Short position overnight fee -0.0001%
Overnight fee time 22:00 (UTC)
Spread 0.026

EUR/USD

1.08 Price
-1.070% 1D Chg, %
Long position overnight fee -0.0092%
Short position overnight fee 0.0030%
Overnight fee time 22:00 (UTC)
Spread 0.00011

USD/JPY

131.22 Price
+1.920% 1D Chg, %
Long position overnight fee 0.0058%
Short position overnight fee -0.0145%
Overnight fee time 22:00 (UTC)
Spread 0.033

GBP/USD

1.21 Price
-1.410% 1D Chg, %
Long position overnight fee -0.0034%
Short position overnight fee 0.0002%
Overnight fee time 22:00 (UTC)
Spread 0.00055

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.

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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