China’s proxy stock market rallied, hawkish pause for RBA

• US-China geopolitical tension remains on heat after the latest China exports curb on key metals for semiconductor chip production.
• China’s proxy stock market; Hang Seng benchmark stock indices rallied to a 5-day high.
• RBA left its policy cash rate unchanged at 4.10%, a pause after two consecutive interest rate hikes but hinted in its monetary policy statement is tilted towards a hawkish pause.

Actions speak louder than words in geopolitics

In the past two weeks, we have witnessed key officials from the US and China engaging in diplomatic meetups to thaw the current frosty relationship; US Secretary of State Blinken has managed to score a brief impromptu meeting with Chinese President Xi during his recent trip to China. US Treasury Secretary Yellen will head to China this week for meetings with top Chinese officials. All these meetings are aligned by an expectation that there will be likely an official Biden-Xi meeting later this year.

The two largest economies are still locked in an economic and trade cold war since 2018, and right now, the scope has expanded towards production and obtaining the technological know-how of higher-end semiconductor chips that powered the Internet of Things, and artificial intelligence networks.

In a tic for tact retaliation on the recent stepped-up rhetoric by the US and its allies that advocated blocking sales of several high-end semiconductor chips to China, China has just announced an export curb on two key metals, gallium, and germanium that are required in the production of some semiconductor chips.  Looks like, the frosty relationship between US and China may persist despite the recent warmer diplomatic receptions between respective officials.

China’s proxy stock market recovered and surpassed the key 200-day moving average

Despite recent dismal China manufacturing and services PMIs data for June, as well as this latest episode of the US-China geopolitical flareup, Hong Kong’s benchmark stock indices have managed to stage a remarkable rebound from their respective last Monday, 27 June lows; Hang Seng Index (+3.44%), Hang Seng TECH Index (+6.27%), Hang Seng China Enterprises Index (+4.11%) at this time of the writing. All these indices managed to have daily closes yesterday, 5 July above their respective 200-day moving averages which suggests that the recent minor downtrend from 16 June 2023 to 26 June 2023 inflicted on these indices may have ended.

Intermarket factor may be the driving force for this recent bout of optimism seen in these key Hang Seng Indices. The offshore yuan (CNH) seems to have started to snap its recent pronounced weakness against the US dollar reinforced by verbal interventions from China’s central bank, PBoC to step up efforts to stabilize the yuan.

Fig 1: USD/CNH medium-term trend as of 4 Jul 2023 (Source: TradingView, click to enlarge chart)

The USD/CNH has started to reintegrate back below a key 7.2500 intermediate resistance intraday at this time of the writing with the daily RSI exiting from its overbought region after a bearish divergence. These observations suggest that the medium-term bullish momentum of USD/CNH has started to wane (i.e. yuan weakness abated) which in turn triggers a positive feedback loop into China’s proxy stock market (Hang Seng indices).

RBA stands pat on further interest rate hike, AUD/USD shed 45 pips

Australia’s central bank, RBA has decided to leave its policy cash rate unchanged at 4.10% after prior two consecutive hikes of 25 basis points each. This latest monetary policy decision has more or less been priced in by the interest rates futures market where odds of a 25 bps rate hike implied by the ASX 30-day interbank cash rate futures has been reduced to 16% as of 3 July 2023 from a chance of 53% seen two weeks ago.

The accompanied monetary policy statement still has some “hawkish flavored” sprinkled on; it highlights that inflation is still too high and will remain so far for some time despite the recent monthly CPI for May showing a further decline. Ended with “the Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that”. Hence, today’s decision seems like a hawkish pause rather than the start of an interest rate cut cycle.

So far, the reaction on the AUD/USD has been negative where it has given up its gains from yesterday’s session but its minor uptrend from 29 June 2023 low has not been damaged. It dropped by -45 pips from its current intraday high of 0.6687 before the RBA’s monetary policy announcement and printed its current intraday low of 0.6641 at this time of the writing. The key short-term support to watch will be at 0.6630 where its price actions have managed to stage a bullish breakout from a minor congestion resistance zone earlier last Friday, 28 June 2023 with key intermediate resistance at 0.6720 (the 20-day moving average & the minor swing high area of 27 June 2023).

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