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Tech stocks led US equities higher overnight with the NASDAQ rising 1.2%.

It has been another day of fairly broad gains in U.S. equities with Tech at the top again. After all, the mega-cap tech stocks have good reason to cope with the virus well, if not take outright advantage due to the lengthy stay at home employer mandates.

The Chinese Renminbi reached its highest levels in more than a year against the US dollar after China posted robust activity data for August. Since May this year, the renminbi has risen 5.4% against the USD. All of which was complemented by a strong start to the regional U.S. manufacturing surveys for September. The Empire State Index rose a better than expected 13.3 pts to 17.

The People’s Bank of China (PBoC) is putting up little fuss about the strong Yuan, and the markets care little about the gradual economic disengagement between the U.S. and China, so long as it doesn’t trigger another round of tariff wars.

And Yuan traders took the most favourable view to China’s olive branch when China’s finance ministry said it would extend existing tariff exemptions for 16 products from the United States.

And with China’s domestic monthly retail sales data continuing to accelerate in tandem with the industrial engines firing on all cylinders, it provides an encouraging read across broader markets.

The risk-on mood continues as markets bounce higher.

More broadly, the bid to cyclicals continues, although it remains focused on the perceived higher-quality sectors such as Chemicals, Miners, and also Luxury. China’s domestic monthly retail sales data keep accelerating – a backdrop against which Luxury typically outperforms.

No question the China data provides a lively read across many counters and encourages investors to move out the risk curve to a degree.

Asia FX: Yuan

The USDCNH pair dropped sharply below 6.80, triggered by better economic data from China. The August activity data saw retail sales melding with production figures solidifying the recovery and pointing to a sustained rebound of the Chinese economy in the coming months aided by strong credit growth.

Along with high current account surplus, traders feel confident marking the RMB an outperformer even though ongoing political angst tempers the November view.

Policymakers’ acceptance of the RMB’s strength should be sufficient to push USDCNH lower so long as it is fundamentally and not speculatory driven. The ultimate goal is still for a floating exchange regime as China prepares to open up its financial market further and internationalize its currency. The market’s next focus is likely to be on whether FTSE Russell announces China’s bonds in the WGBI at its review on September 24.

The Ringgit

The Malaysian Ringgit (MYR) continues to perform well as Asia EM FX continues to lead the reflationary charge after China Industrial Production and Retail sales better than expected.

The PBOC conducts a larger-than-expected medium-term lending facility operation, and the Global Times reported that a vaccine could reach the general public in November.

Oil prices are trading higher today on the same reflationary bounce, which could encourage more bond and equity inflow. And local currencies with a healthy beta to the CNH, like the ringgit, will stand to improve significantly so long as China reopening narrative remains steady.

US Dollar and FOMC statement

Yesterday’s nascent reflation trade and the dollar down day triggered by stronger than expected data out of China is giving way to FOMC uncertainly.

While the inverse relationship seen recently between equities and the USD remains redoubtable but predictably the forex market is distracted by the FOMC, which concludes today.

Unless there is a surprise at the FOMC, I do not think this week’s Fed meeting will matter much to financial markets. The next important catalyst is probably the vaccine results in late September or early October.

There could still be a decent reaction to the dollar and risk in general if the Fed uses the second opportunity to explain precisely what flexible Average Inflation Targeting (AIT) means.

Currently, traders are still a tad confused by the absence of exact AIT parameters post-Jackson Hole.

We all understand what the AIT means for the future: The Fed will stay lower for longer when the unemployment rate falls. They will not hike rates until actual inflation has been above 2% for a while. This shift from proactive to reactive is well understood. But what does this mean for policy today?

Gold rally stalls

The Gold rally stalled as trader look to the FOMC for the next course of direction and projections, which extend to 2022. At the moment, records show only 2 of the 17 Fed members expect rates to move up in 2022.

The main question for gold investors is that with improving data and a vaccine on the horizon, how many Fed members will start to whistle a less dovish tune and bring forward rate hike expectations.

This could be where the policy debate most likely centres. But for gold to go significantly higher, the Fed must make a credible promise to act full dove and aggressively drive inflation expectations higher.

International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp