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Do you have to run in AUX to get XM Radio? Your receiver and unit sound like its ok. This could be a problem with your provider. Contact your provider and their tech dept can help you organise a solution. Is your radio, XM ready?
I have the same problem with a CDE-9870R and my iPod. I tried my daughter's iPod, and it works. I did not search any further, but it may come from the iPod software version. Mine is more up-to-date than hers (5th generation iPod 1.1.2 2006-06-28 update).