Asia Update: Rising empires hit high levels

Markets

U.S. stocks traded stronger on Tuesday, the S&P up 0.5%, again underpinned by tech stocks, with NASDAQ rising 1.2%. European stocks were firmer as well, while Asia was mixed. US10Y yields lifted 1bp to 0.68%, oil was up 2.7% and gold down a bit. 

The renminbi reached its highest levels in more than a year against the USD after China posted robust activity data for August; since May this year, the renminbi has risen 5.4% against the USD. This was all complemented by a strong start to the regional U.S. manufacturing surveys for September; the empire state index rose a better than expected 13.3pts to 17.  
The PBoC is putting up little fuss about the strong Yuan and the markets care little about the gradual economic disengagement between the U.S. and China – so long as it doesn't trigger another round of tariff wars. And the market took the most favorable view of China's olive branch after its finance ministry said it would extend existing tariff exemptions for 16 products from the United States. 
 
It’s been another day of fairly broad gains in U.S. equities, with tech at the top again. After all, the mega-cap tech stocks have good reason to cope with the virus well, if not take outright advantage due to the lengthy stay at home mandates from employers. 
 
And with China's domestic monthly retail sales data continuing to accelerate in tandem with the industrial engines firing on all cylinders, it provides an encouraging read across broader markets. The risk-on mood continues as markets bounce higher. More broadly, the bid to cyclicals continues, although it remains focused on the perceived higher-quality sectors such as chemicals, miners and luxury; China's domestic monthly retail sales data keep accelerating and that’s a backdrop against which luxury typically outperforms. No question the China data provides a lively read across many counters and encourages investors to move out the risk curve to a degree. 
 
Currency Markets

Asia FX 
 
Yuan 
 
USDCNH dropped sharply below 6.80, triggered by better economic data from China. The August activity data saw retail sales melding with production figures solidifying the recovery and pointing to a sustained rebound of the Chinese economy in the coming months, aided by strong credit growth. 

Along with high current account surplus, traders feel confident marking the RMB an outperformer, even though ongoing political angst tempers the November view. Policymakers' acceptance of RMB strength should be sufficient to push USDCNH lower so long as it’s fundamentally and not speculatory driven. 

The ultimatevgoal is still for a floating exchange regime as China prepares to open up its financial market further and internationalize its currency. The market's next focus is likely to be on whether FTSE Russell announces China's bonds in the WGBI at its review on September 24. 
 
The Ringgit 
 
The MYR continues to perform well as Asia EM FX continues to lead the reflationary charge after China Industrial Production and retail sales were better than expected. The PBOC conducted a larger-than-expected medium-term lending facility operation, and the Global Times reported that a vaccine could reach the general public in November.
 
Oil prices are trading higher today on the same reflationary bounce, which could encourage more bond and equity inflow. And local currencies with a healthy beta to the CNH, like the ringgit, will stand to improve significantly so long as China’s reopening narrative remains steady. 
 
The U.S. dollar (G-10)

Yesterday's nascent reflation trade and the dollar down day, triggered by stronger than expected data out of China, is giving way to FOMC uncertainly. 
 
While the inverse relationship seen recently between equities and the USD remains redoubtable, predictably the FX market is distracted by the FOMC, which concludes today. But unless there’s a surprise at the FOMC, I don’t think this week's Fed meeting will matter much to financial markets. The next important catalyst is probably the vaccine results in late September or early October. 
 
Still, there could be a decent reaction to the dollar and risk in general if the Fed uses its second opportunity to explain precisely what Flexible Average Inflation Targeting means. Currently, traders are still a tad confused by the absence of exact AIT parameters post-Jackson Hole. We all understand what the AIT means for the future: the Fed will stay lower for longer when the unemployment rate falls and they won’t hike rates until actual inflation has been above 2% for a while. This shift from proactive to reactive is well understood, but what does it mean for policy today? 
 
 Will they need to immediately become more accommodative to stoke the inflationary fires and get the Core PCE above 2 % as soon as possible? Or is the framework only meaningful down the road? 
 
USDJPY is trading lower as there’s one thing traders know for sure: the end of Abenomics is not bullish USDJPY. After all, the architect of the move from 75 to 125 is no longer in power and that has to at least increase the left tail risk a bit for USDJPY.
 
The USD and gold's twin fates are inextricably intertwined these days, so I’d keep an eye on the gold reaction post-FOMC, which should be a strong signal for dollar direction.
 
Gold Markets
 
The Gold rally stalled as traders look to the FOMC for the next course of direction FOMC projections, which extend to 2022, that show just 2 of the 17 Fed members expect rates to move up in 2022. 

The main question for gold investors is that with improving data and a vaccine on the horizon, how many Fed members will start to whistle a less dovish tune and bring forward rate hike expectations?