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The Australian and New Zealand Dollars rallied strongly against a receding US Dollar on Tuesday but the recoveries in AUD/USD and NZD/USD were stymied, perhaps only temporarily, when AUD/CNY and NZD/CNY collided with the daily limits prescribed by the People’s Bank of China.
AUD/USD rallied some 1.69% to reach an intraday high of 0.6086 in an extended recovery from the March 2020 lows briefly traded in Monday’s global market meltdown, and the top coincided with AUD/CNY’s rally to a high of 4.4585, which brought it within a whisker of a daily upper limit that was set at 4.4603 on Tuesday.
The upper limit was raised on Tuesday, from 4.4426, as the PBoC lifted the central parity to 4.3729, from 4.3555, at the same time as it raised the central parity for USD/CNY to 7.2038, from 7.1980. However, it’s not possible for Beijing to enforce simultaneous tops in these pairs without also imposing a cap on AUD/USD.
That appears to be what happened on Tuesday, however, the central parity and related limits would likely rise again on Wednesday if the PBoC follows the usual rules comprising its Central Parity Formation Mechanism, one of which prescribes that its fixes should follow in the direction of the prior day’s market movements.
“We will not relive yesterday’s equity volatility here as it can simply be labelled a mess,” says Laoise Ni Thighearnaigh, a trader on the FX desk at JPMorgan, in a Tuesday market commentary.
Above: AUD/USD shown at 15-minute intervals alongside AUD/CNY. Click for closer inspection.
“The tariff situation is not any better as the Chinese are on a firm escalation path, while others are willing to talk but not quite sure what they need to do. Nevertheless, we were overdue a little relief,” she adds.
Just as AUD/USD’s recovery encountered headwinds from AUD/CNY on Tuesday, so too did the correlated NZD/USD, which rallied 1.81% to an intraday high of 0.5626 just as NZD/CNY climbed to 4.1199, bringing it to within a whisker of Tuesday’s maximum allowable level of 4.1216 before both pairs reversed lower.
Similarly, NZD/CNY’s upper limit was also raised overnight, from 4.1127, as the PBoC lifted the central parity to 4.0408, from 4.0336, just as it raised the central parity for USD/CNY to 7.2038, from 7.1980. However, it’s also not possible for Beijing to enforce tops in these pairs without also imposing a cap on NZD/USD.
The PBoC raised the central parities for exactly 12 of the 25 currencies in the China Foreign Exchange Trade System index on Tuesday, with these accounting for 49.76% of the barometer, in fixings that seemingly reflect Beijing’s often-repeated preference for a ‘basically stable’ trade-weighted exchange rate.
The balanced fixes contradict the widely-held notion that Beijing might be seeking to devalue the renminbi, while reinforcing the tentative bottom and six-month lows marked out by the RMB/CFETS index in mid-March, which saw the Federal Reserve’s Broad Dollar Index and the ICE US Dollar Index both follow suit soon after.
Above: NZD/USD shown at 15-minute intervals alongside NZD/CNY. Click for closer inspection.