Overnight Market & Currency Developments – From Our Bankers

Overnight Developments

  • USD pared back some of its post-FOMC meeting gains and US 10-year Treasury yield are largely unchanged at around 2.27%. Fed funds future are now discounting a 72% probability of a 25bps December fed funds rate hike. While there is room in the near-term for US interest rate futures to adjust higher in favour of USD, USD upside is limited. The Fed’s interest rate normalisation cycle is at a mature stage while many major central banks now appear to be moving towards less monetary policy accommodation.

Over the next 24hrs, speeches by 2018 FOMC voter John Williams (8pm Sydney), non-voter Esther George (11:30pm Sydney) and voter Robert Kaplan (Sat, 3:30am Sydney) can generate some USD volatility.

  • AUD underperformed across the board after RBA Governor Philip Lowe cooled down talk of rate rises during his speech yesterday afternoon. AUD/USD fell overnight. There was some speculation ahead of the speech that Dr Lowe may lay the groundwork for future rate hikes. Instead, Dr Lowe delivered an optimistic but certainly not hawkish tone. He is positive about growth prospects, given encouraging job growth, elevated business conditions and improvements in the non-mining sector (and even WA).

However, Lowe also stressed the current issues of weak wage growth and household income, subdued inflation and high household debt. The key point was the comment that “a rise in global interest rate rises has no automatic implications for Australia”. In Q&A, the Governor acknowledged that the next move in rates is likely to be up, not down, but also urged patience in saying the rate won’t be moved for some time.

Nonetheless, we still expect AUD/USD to trade closer to 0.8000 by year-end. Australia’s higher terms of trade, the structural improvement in Australia’s current account deficit, and positive real interest rates spread between Australian and the U.S. favour a higher AUD/USD.

 

Overnight Data:

  • US home prices rose by 0.2% in July and are 6.3% higher over the year (up 6.5% in year to June). The Philadelphia Federal Reserve index rose from +18.9 to +23.8 in September (forecast +17.2). The leading index rose by 0.4% in August (forecast +0.2%). New claims for unemployment insurance fell by 23k to 259k in the latest week.

 

Global Equity Markets:                                                                                                                  

  • European share markets were mixed as traders debated the implications of a potential rate hike in the US in December and moves by the Federal Reserve to trim its balance sheet in October. Traders were also cautious ahead of German elections over the coming weekend. There were a number of pieces of corporate news that were generally positive for markets. The STOXX 600 rose by 0.3%. The German Dax also rose by 0.3% but the UK FTSE fell by 0.1%. In London trade, shares in Rio Tinto fell by 1.2% while BHP fell by 0.6%.
  • US share markets fell as investors assessed the impact of the Federal Reserve’s signal that it intends to raise interest rates later this year. Technology shares led the decline as Apple shares fell by 1.7% on concerns over demand for its new smartphone. The Dow Jones fell 53 points or 0.2%. The S&P 500 declined by 8 points or 0.3%. The Nasdaq fell by 33 points or 0.5%.

 

Commodities:                                                                                         

  • Global oil prices rose modestly on Thursday as traders awaited a meeting of OPEC oil ministers and some non‑OPEC producers such as Russia on Friday who will consider options to restrict oil supply to boost prices. Brent crude rose by US14 cents or 0.2% to US$56.43 a barrel. US Nymex rose by US14 cents or 0.3% to US$50.55 a barrel.
  • Base metal prices fell by up to 3.4% on the London Metal Exchange with nickel down the most. But lead bucked the trend, up by 3.0%.
  • The December Comex gold futures price fell by US21.60 or 1.6% to US$1,294.80 per ounce. The spot gold price was trading around US$1,291 an ounce in late US trade. Iron ore fell by US$5.00 or 7.4% to US$63.00 a tonne.

 

Ahead:

  • In Australia, no major data is released.
  • In the US and Europe the Markit “flash” purchasing managers survey results for September are released.

 

Indicative Rates (Bank to Sell):

AUD / USD 0.7884 AUD / CAD 0.9640 USD / JPY 112.48
AUD / JPY 88.30 AUD / THB 25.35 GBP / USD 1.3581
AUD / EUR 0.6585 AUD / HKD 6.0928 NZD / USD 0.7310
AUD / GBP 0.5780 AUD / SGD 1.0628 NZD / EUR 0.6121
AUD / NZD 1.0768 AUD / FJD 1.5756 AUD / CNY 5.1941
AUD / CHF 0.7500 AUD / PGK 2.4921 All Ordinaries 5716.73
AUD / DKK 4.8896 EUR / USD 1.1793 Gold $US/oz 1291.78
AUD / SEK 6.2702 EUR / GBP 0.8794 Oil WTC $/b 50.53

 

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