China turns the tide on AUDUSD rally

A reminder that it won’t only be the U.S. election and prospects of a coronavirus vaccine that drives markets into year-end and that China will continue to play a role in the near term fortunes of markets.

Charts (1)

Evidence of this was the sharp selloff yesterday in the Chinese currency, the yuan after the PBOC cut the 20% reserve requirement for forwards contracts to 0%, effective yesterday. The 20% reserve requirement was first introduced in late 2015 when the yuan was under significant pressure following exchange rate reforms.

It was reintroduced in August 2018 to slow yuan weakness coming from the escalation in U.S-China trade tensions. However since May 2020, the yuan has rallied strongly and gained pace over the past week, reflecting the increased probability of a Biden victory in the U.S election and an easing of U.S-China trade tensions.

The removal of the 20% reserve requirement is likely to be aimed at slowing the pace of further yuan appreciation and not an attempt to reverse its direction. Apart from removing a deterrent for companies to hedge currency risk, it will also help maintain the growth path of China’s economic recovery.

As the chart below shows, the AUDUSD and the CNY have rallied strongly together since May of this year. The emergence of a headwind in the CNY yesterday, also represents a headwind to the AUDUSD.

China turns the tide on AUDUSD rally

Also weighing on the AUDUSD reports that Chinese authorities have verbally instructed Chinese power stations and steel mills to stop using Australian coal. This would represent an escalation in diplomatic tensions between Australia and China that have already resulted in China suspending imports of Australian wheat, beef, and wine to varying degrees.

The two developments outlined above have sent the AUDUSD back below key support at .7210c and this opens up a test of last weeks .7095 low. In a nutshell, after the events of the past 24hours, there is enough reason to warrant a more cautious near term view of the AUDUSD and other AUDXXX rates, including AUDJPY and AUDNZD.

China turns the tide on AUDUSD rally

Source Tradingview. The figures stated areas of the 13th of October 2020. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation


This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

GAIN Capital Singapore Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the GAIN Capital group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), GAIN Capital Singapore Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact GAIN Capital Singapore Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither GAIN Capital Singapore Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

GAIN Capital Singapore Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit for the complete Risk Disclosure Statement.

Important Notice:

Cryptocurrencies are not legal tender currency and trading of derivatives on Cryptocurrencies are currently not covered under any regulatory regime in Singapore. Consequently, investors should be aware they do not have protection under the Securities and Futures Act (Cap. 289). Please ensure that you are fully aware of the risks.