CHINA: Bond Futures Up on Third Day of Liquidity Injections

US equities have gapped higher on the open as both the US and China attempt to lower the temperature and look to set a more conciliatory tone as China played down the impact of its new controls, E-minis(S&P) +1.30%, NQZ5 +1.80%. The AUD is looking to regain some of its losses after some brutal moves lower in the crosses on Friday.

• EUR/AUD - Friday night range 1.7621 - 1.7758, Asia is currently trading around 1.7805. The pair exploded off its support around 1.7600 and this morning rejected the move back above 1.7900. Price remains within its recent 1.7600 -1.8100 range, with very little direction as the market tries to work out how this US/China impasse plays out.
• GBP/AUD - Friday night range 2.0244 - 2.0637, Asia is trading around 2.0460. The pair had a false break sub 2.0300 and launched higher on Friday. The price is back within its wider 2.0250-2.1050 range, my preference would be to be skewed from the short side but a lot now rides on how risk is able to perform from here. 
• AUD/JPY - Friday night range 97.87 - 100.39, Asia is trading around 99.15. The pair had an ugly rejection above 100. This morning the pair has bounced in sympathy with risk rallying, but it will need this move in risk to get back to the previous highs for it to look at breaking above 100 again.
• AUD/NZD -  Friday night range 1.1313 - 1.1414, the cross is dealing in Asia around 1.1370. The Cross failed again above the 1.1400 area where I suspect initial paring back of longs. A clear sustained break above 1.15/1.16 resistance and the market will begin to think about levels back towards 1.2000 and above. Dips back toward 1.1200 should be a good place to start buying again if seen.

Fig 1: GBP/AUD spot 2H Chart

Source: MNI - Market News/Bloomberg Finance L.P

The BBDXY range Friday night was 1212.40 - 1216.00, Asia is currently trading around 1212, -0.10%. The USD correction higher stalled just as it began to probe its test longer-term resistance. The 1215-1225 area remains tough resistance, only a sustained close back above 1230 would start to challenge the conviction of the USD shorts. The weaker hands may be folding but I suspect we would need to do some work before the market can call a low for the USD as longer term accounts potentially look to fade this squeeze as they increase hedging ratios.

• MNI: Musalem Says Fed Should Be Cautious In Further Rate Cuts. “ I am open minded about a potential further reduction in interest rates to provide further insurance against labor market weakening. I believe that we have to tread with caution, because there’s limited room for further easing before monetary policy could become overly accommodative.” 
• Brad Setser on X: “I don't think it should be a surprise that an equity sell off weakens the dollar -- but that isn't what is in a lot of big risk models, which assume based on past correlations that the dollar rises when equities fall, providing a bit of a hedge for dollar equities.”

Fig 1: BBDXY Daily Chart

Source: MNI - Market News/Bloomberg Finance L.P

China equity markets have opened up weaker amid renewed US-China trade tensions, but we sit up from early lows. Some higher beta/tech sensitive markets are challenging their respective 20-day EMA support points. This follows though a very strong run higher in recent months. Onshore media continued to express confidence in the outlook. Via BBG: "There’s no need to be “overly pessimistic” about China’s A-share market as its medium-term momentum remains intact despite external shocks, Shanghai Securities News reported Monday, citing brokerages." 

• Weakness today builds on losses from Friday, which came prior to the latest Trump tariff threat. Sentiment was weighed then by concerns around export controls in the tech sector, along with valuation concerns.
• Losses in the CSI 300 were close to 3% at one stage but have since been pared (now back closer to 1.35%). We dipped below the 20-day EMA but have since recovered (see the chart below). For higher beta plays, like the Chinext, we are still under the equivalent support point. This index is still down around 2% at this stage.
• The language used by US officials (including US President Trump) suggests scope to negotiate ahead of the Nov 1 deadline for new tariff rates to come into effect. An off-ramp to the 100% tariff threat will be eyed, while Trump's threat on export controls on critical software could also impact China tech related sentiment. 

Fig 1: CSI 300 Supported Under 20-day EMA Support Point

Source: Bloomberg Finance L.P./MNI