Summary: The Euro extended its drop to fresh May 2017 lows at 1.0884, settling at 1.0900 even as German support for fiscal reforms rise. Euro weakness, a significant contributor, boosted the Dollar Index (USD/DXY) to 99.39 to 24-month highs for a gain of 0.31%. Strong end-Q3 seasonal demand and uncertainty over US-China trade negotiations lifted the Greenback to broad-based gains over its rivals. The Dollar finished up 0.75% against the Swiss Franc to 0.9982 and rallied against the Japanese Yen to 108.08 from 107.95. Sterling finished little changed at 1.2300 (1.2292). The Australian Dollar closed modestly lower at 0.6750 from 0.6767 with 80% of traders expecting an RBA rate cut of 0.25% at the conclusion of their policy meeting today. The focus will be on the RBA rate statement and future guidance.
The end of Q3 saw Wall Street stocks rally. The Dow lifted 0.61% to 26,994. The S&P 500 gained 0.71%. The US 10-year treasury yield closed at 1.67% (1.68%).
China’s National Sept Manufacturing PMI climbed to 49.8 from 49.5 while China’s Caixin Manufacturing PMI beat forecasts, up to 51.4% from median expectations of 50.2. German Retail Sales in September matched forecasts at 0.5%. The Eurozone Unemployment rate improved to 7.4% from 7.5% the previous month. US Chicago PMI underwhelmed in September with a 47.1 print against forecasts of 50.0.
- EUR/USD – The multi-currency traded to May 2017 lows of 1.08855 before rallying to close at 1.0900 in early Sydney. Germany’s former Bundesbank head Alex Weber supported Mario Draghi’s call for fiscal stimulus although markets don’t see the Germans supporting this yet.
- USD/JPY – Quarter and Japanese half-year end demand for USD saw this currency pair rally to 108.18, settling at 108.08 at the New York close. Japan’s 10-year JGB yield rose 2 basis points to -0.23%.
- AUD/USD – The Australian Dollar dipped to 0.6750 from 0.6767 into today’s RBA policy meeting and rate announcement. With 80% of traders expecting the Australian central bank to cut the Cash rate by 0.25% to 0.75%, the Aussie’s downside appears limited. Traders will be focussed on the RBA statement and forward guidance. Meantime speculative Aussie short bets remain elevated.
On the Lookout: Today’s big event to start Q4 up and running is the RBA policy meeting, rate announcement and statement with forward guidance. The rest of the day brings more data for markets to scrutinise. Chinese markets are away today to celebrate their National Day. Watch out for political statements which can be broadcast throughout the day.
A plethora of Japanese data kicks off the day with Japan’s September Unemployment Rate, Final Manufacturing PMI, Tankan Manufacturing and Non-Manufacturing PMI. Australia reports its Building Approvals which will set the tone for the RBA rate announcement which follows (2 pm Sydney time). European reports begin with the UK Nationwide House Price Index for September. The UK also releases its Manufacturing PMI. Euro area data sees Spanish, Italian, French, German and Eurozone Final Manufacturing PMI’s. The Eurozone Flash Headline and Core CPI readings will also be released. Switzerland reports its Manufacturing PMI and Retail Sales. Canada reports on its September GDP (m/m). The US ISM Manufacturing PMI, Final Manufacturing and Construction Spending. A busy data day indeed with manufacturing PMI’s figuring prominently. The fall in the Chicago PMI report may affect the national level.
Several FOMC members will be speaking, Clarida, Bullard and Bowman. Bundesbank President Weidmann speaks at a handover ceremony sponsored by the Austrian Central bank, in Vienna. RBA Governor Philip Lowe speaks at an RBA Board dinner in Melbourne.
Trading Perspective: The broad-based US Dollar rally was the result of seasonal demand for the Greenback. Euro weakness was a major contributor to that. Other currencies were little changed (Sterling, Canadian Dollar, Singapore Dollar, Thai Baht). As we begin a new quarter, expect the Dollar to ease against its Rivals. We look at market positioning tomorrow with the likelihood of an increase in speculative USD longs.
US bond yields were flat with the US 10-year rate closing at 1.67%. Global rival yields were mostly higher. Australian 10-Year bond yield rallied 7 basis points to 1.01% just ahead of todays RBA policy meeting. This risks a short squeeze in the currency.
- AUD/USD – The Aussie Dollar dipped to 0.6750 in anticipation of an RBA rate cut later which would bring the Official Cash rate to 0.75%, its lowest ever. This would be the 3rd time this year for the RBA to trim rates. Eighty percent of traders have this factored which is priced into today’s rate, currently at 0.6750. ING’s Economic Analyst Francesco Pesole highlighted in an article that speculative markets remain “intensely short AUD”. While the forward language will be key, speculative shorts now reach 29% of open interest. Pesole also highlights that the Australian Dollar rose 7 out of the last 8 RBA meetings in the 24 hours following. The Australian Trade Weighted Index remains near decade lows. This is another support for the Aussie Battler. AUD/USD has immediate support at 0.6740 followed by 0.6710. Immediate resistance can be found at 0.6780 followed by 0.6810. Look for a likely range of 0.6740-0.6820 today, prefer to buy dips. Get ready for a short squeeze.
- EUR/USD – The Euro traded heavy despite mixed Euro area data released yesterday. The sentiment for the Euro remains decidedly bearish. More German officials have backed Mario Draghi’s call for fiscal support for the Euro zone. The onus is on Germany with many traders doubting the Germans. Today sees Euro area and Eurozone, as well as US ISM and Final Manufacturing PMI reports. EUR/USD has immediate support at 1.0880 followed by 1.0840. Immediate resistance can be found at 1.0910 followed by 1.0940. Look for a likely range today of 1.0885-1.0945. Prefer to buy dips.
- USD/JPY – The Dollar has rallied against the Japanese currency in the last 4 trading days up to 108.180 highs twice, the latest last night. Overnight Japan’s 10-Year JGB yield was up 2 basis points to -0.23% while its US counterpart was 1 basis point lower. Japanese Tankan Manufacturing and non-manufacturing PMI’s are released today as well as Final Manufacturing PMI. With a narrowing yield differential expect the USD/JPY topside around 108.20-30 to hold. This is today’s immediate resistance. The next resistance level lies at 108.50. Immediate support can be found at 107.80 followed by 107.50. Look for a likely range today of 107.70-108.20. Prefer to sell rallies.
Happy trading and Tuesday all.