CNH Rally Sending The Dollar Lower, Gold Stays Above $1,800

Asian stocks are seeing modest gains tracking US tech shares, which climbed to new highs, as investors looked past tensions between Washington and Beijing.
 
China A50 Futures also seen strong demand MTD +18% with Open Interest climbing 12% back to July 2019 levels. Fresh longs have been reported mostly foreign buyers chasing the rally.
 
USD/CNH temporarily sliced through 7 levels like a hot knife through butter as there appears to be little if any push back from the PBoC and northbound connect inflows suggest its not only China retail buying into the stock market rally but so are foreign speculators.

With USD/CNH cratering, the knock-on effect is sending USD dollar broadly lower, which itself is hugely Asia risk supportive.
 
The most common pushback for more acute CNH rally is that it does not help China's external-facing economy amid a slow recovery in global export demand. While it counts, it probably means a more gradual CNH appreciation as the focus shifts the daily fix, rather than being a reason to buy dips in the pair.

Rising China-US 10-year yield differentials and upbeat activity data on the mainland support USD/CNH downside. Also, the rebound in China inflation  metrics will likely ease some deflation concerns and give policymakers a little bit more room to relax and supports the differential trade.
 
While my first instinct when I saw USD/CNH break 6.99 was to think AUD/USD should be much higher, but it is worth remembering that AUD/USD has been leading the entire way while USD/CNH has been a massive laggard.

So let us consider the CNH move through the lens of an AUD/USD catch-up trade. The AUD completed the March beat down round trip in Jun while a round trip for USD/CNH would take us back to 6.8700. So, it makes more sense to double down on the CNH longs rather than buy AUD, thus avoiding the high beta and fickle nature of risk sentiment that causes the AUD/USD to zig-zag.
 
The EUR/USD is catching a nice bounce from the USD/CNH cratering coupled with the HKMA intervention that should also see portfolio rebalancing out of USD into EUR. Indeed this is an unexpected and potent kicker in the lead up the EU summit July 17, if you are long EURUSD that is.
 
Gold
 
Gold stays above the psychologically important $1800 level as virus-fearing investors head for safe havens. The yellow metal is up almost 20% on the year amid nonstop ETF buying. It is benefiting from zero interest rates by central banks and government schemes that flood markets with liquidity. 
 
The ETF build continues to be the driver with another 600k reported this week. Gold is supported at 1805 and 1785, while resistance lies at $1845. Vols were a touch higher but unmoved overnight, as there was no sense of panic as gold broke $1800 for the first time since 2011. The ease of the break and how methodically controlled the move through $1800  was suggested we could see a lingering bid for quite a while

Indeed it's tough to buy dips today if you are late to the party.