Protests continue in China - will Xi relent and ease lockdowns? December seasonals support higher risk assets - will the rally resume?

By Stuart Talman, XE currency strategist

Negative risk sentiment has filtered through risk assets to start the new week driven by civil unrest in China as citizens continue to speak-out against President Xi Jinping’s endless mass lockdowns.

Many political commentators have declared that this is the Chinese government’s toughest political test since Tiananmen Square in 1989.

Over the past couple of days, protests have erupted in Beijing, Shanghai, Urumqi and other cities – the Chinese people have had enough. In very rare scenes, people have been calling for Xi to step down and democratic freedoms such as freedom of speech.

The protesters are risking lengthy jail sentences.

The G10 currency space is fragmented – the dollar logging its largest gains against the China sensitive Australian and New Zealand dollars and commodity linked currencies, including the Canadian dollar and the Norwegian Krone.

Starting Monday on the back foot, the Kiwi opened around half-a-percent lower from Friday’s close, extending lower throughout Asian trade. Falling through 62 US cents, afternoon lows were logged a pip or so above 0.6190.

Losses were pared through the European session, NZDUSD rebounding back to the 0.6240’s before resuming the sell-off through the New York morning.

The fierce risk rally that commenced off the 13 October cycle lows looks to be stalling, two days of selling pulling the Kiwi down from last week’s high near 63 US cents.

December has been one of the strongest month’s for the New Zealand dollar over the past 10 years, however seasonality may be challenged this December should the situation in China disrupt the growth outlook.

Or perhaps it may be that demonstrations and civil unrest have a positive effect on China’s abandonment of Covid-zero.

It will be fascinating to see what happens next.

Will Xi shorten the re-opening timeline to appease his people or will he respond with harsher lockdowns and repression?

Should he opt to bring forward China’s abandonment of Covid-zero, global equities and the Australian and New Zealand dollars would likely be propelled higher, the Aussie to outperform the Kiwi.

Regarding the antipodean cross, Monday’s price action lifted NZDAUD back up to 0.93. The cross was unable to sustain prices at this level, retreating back to the mid-0.92’s.

For as long as Covid-policy uncertainty persists in China and the RBNZ remains relatively hawkish, NZDAUD likely remains within reaching distance of recent highs and perhaps extends higher.

In other currency news, the euro continues to hold up against the dollar, EURUSD consolidating between 1.0225 and the high 1.0400’s over the past few weeks.

Easing energy crisis concerns, improving sentiment and hawkish ECB-speak have supported the euro’s recovery from late September cycle lows below 0.96.

Market pricing for a third consecutive 75bps hike from the ECB has firmed in favour of the larger increment (versus 50bps) in recent days as multiple Fed officials have confirmed that it is premature to start slowing the pace of rate hikes, despite the slowing in economic activity.

The Kiwi peaked above 0.6030 against the euro last week, trading above its 200 day moving average for the first time since early September.

Overnight price action has driven NZDEUR back below the widely monitored 200d MA, lows logged a few pips below 0.5940.

The pair likely remains under pressure in the short term , particularly if Wednesday evening’s preliminary reading of eurozone inflation exceeds the projected outcome of 10.4%.

To the day ahead, it’s a quiet one for regional data releases. The offshore calendar delivers German CPI, Canadian GDP, US housing data and multiple speeches from Fed, ECB and BoE officials.

Unless the news flow out of China turns positive, expectations are for further downside for the Kiwi , settling below 62 US cents.

Stuart Talman is Director of Sales at XE. You can contact him here.