Overnight Market & Currency Developments – From Our Bankers

Overnight Developments:

  • USD was stable before and after the FOMC meeting. US 10 year Treasury yields eased by 1bp. As was widely expected, the FOMC left monetary policy unchanged. The FOMC’s statement was balanced and similar to September’s statement. Economic activity was upgraded from moderate to “solid” but core inflation was downgraded was described as “soft”. We still expect the FOMC to increase the funds rate in December, though today’s statement did not exactly pave the way to a hike. In other US news, the manufacturing ISM was softer than expected at 58.7pts though that is still a strong result.
  • Kevin Brady, the Republican chairman of the House ways and means committee, is expected to unveil a comprehensive tax plan tonight or tomorrow morning (Sydney time). Assuming a credible and detailed plan for large tax cuts is unveiled – not another list of aspirations – the USD could rally strongly. We see more upside to the USD if the tax cuts are skewed to corporate income tax rather than personal income tax because lower corporate income tax would support the US equity market (from already high levels) and induce capital flows into the USD.
  • The other big event scheduled is the nomination of Trump’s choice for Fed chair (6am tomorrow, Sydney time). John Taylor or Kevin Warsh as Fed Chair would be the most bullish for the USD. In contrast, if Jerome Powell or Janet Yellen are selected, the USD will likely face some intra‑day headwinds as the odds of a hawkish Fed chair unwind. Powell speaks at “Alternative reference rates” tonight (11.30pm Sydney time).
  • AUD/USD remains in a tight range. AUD outperformed most cross rates, supported by an increase in iron ore prices. We expect today’s September trade balance to show a surplus of $950 million because of unchanged bulk commodity prices (11.30am). We expect building approvals to decrease by 2.5% though remain at a very high level because of low interest rates and strong growth in population. But the main driver of AUD this week will be the USD developments described above.

 

Overnight Data:

  • The US Federal Reserve left the federal funds target rate range at 1.00‑1.25%, as expected. The Fed described economic growth as “solid” and core inflation as “soft”. Financial markets believe there is a 92% chance of a rate hike in December. We expect the Fed to lift the policy rate at the 12‑13 December meeting.
  • In US economic data, the ISM manufacturing index eased from 60.8 to 58.7 points in October (forecast 59.5). Construction spending rose by 0.3% in September (forecast flat). The ADP series of private payrolls showed that jobs lifted by 235,000 in October (forecast +200,000).

 

Global Equity Markets:                                                                                                                  

  • European sharemarkets lifted to 2‑year highs on Wednesday. The German DAX soared by 1.8% to record highs while the UK FTSE eased by just 0.1%.
  • US blue‑chip shares rose on Wednesday although technology shares eased. There were few surprises in the latest Federal Reserve decision. Economic data was generally encouraging. The Dow Jones rose by 58 points or 0.3% after being up 140 points in early trade. The S&P 500 was up by 0.2%.

 

Commodities:                                                                                         

  • Global oil prices eased on Wednesday as traders digested the latest weekly US inventory report. The Energy Information Administration said that crude stocks fell by 2.4 million barrels in the latest week, ahead of forecasts for a 1.8 million decline but short of the 5.1 million barrel decline reported by the American Petroleum Institute on Tuesday. Brent crude fell by US45 cents or 0.7% to US$60.491.37 a barrel. US Nymex fell by US8 cents or 0.1% to US$54.30 a barrel.
  • Base metal prices rose by up to 4.1% on the London Metals Exchange on Wednesday. Nickel led the gains while zinc rose by only 0.1%.
  • The gold futures price rose by US$6.80 or 0.5% to $1,277.30 an ounce. The spot gold price was trading around US$1,276 an ounce in late US trade. Iron ore rose by US10 cents or 0.2% to US$58.50 a tonne.

 

Ahead: 

  • In Australia, international trade data is released with building approvals.
  • In the US the Challenger series of job layoffs is released with the weekly data on claims for unemployment insurance and data on labour costs and productivity.

 

Indicative Rates (Bank to Sell):

AUD / USD 0.7629 AUD / CAD 0.9732 USD / JPY 114.14
AUD / JPY 86.69 AUD / THB 24.54 GBP / USD 1.3252
AUD / EUR 0.6545 AUD / HKD 5.8887 NZD / USD 0.6894
AUD / GBP 0.5731 AUD / SGD 1.0366 NZD / EUR 0.5930
AUD / NZD 1.1050 AUD / FJD 1.5872 AUD / CNY 5.0382
AUD / CHF 0.7497 AUD / PGK 2.3915 All Ordinaries 6005.49
AUD / DKK 4.8606 EUR / USD 1.1476 Gold $US/oz 1274.78
AUD / SEK 6.3935 EUR / GBP 0.8773 Oil WTC $/b 54.27

 

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