AUD Races Higher With JPY Bid As GBP Slides; Metals, Oil Gain

The Australian dollar was brightest against major peers through the European session as AUD/USD strengthened to US$ 0.9446, EUR/AUD depreciated to A$ 1.4418, AUD/JPY improved to ¥91.80, and AUD/CHF gained to CHF 0.8489. AUD moved higher on changing interest rate expectations as interest rate swaps are now pricing in about a 69% chance the RBA will keep its benchmark lending rate unchanged at 2.5% at its meeting on 3 December, up from about 62% in September. Westpac upped its year-end forecast for A$ to US$ 0.95 from the prior US$ 0.92 forecast and has pushed back its RBA rate cut predictions to February and May. Similarly, NAB has pushed back its forecast for a rate cut to February from November and CBA now sees AUD/USD at US$ 0.94 at year-end. In contrast to ongoing expectations of RBA easing, swaps indicate about a 65% chance RBNZ will raise its benchmark rate to at least 2.75% by March. Chinese services PMI data will be released on 8 October. Australia sold 4-year bonds today that were 4.14 times oversubscribed, higher than its previous auction. RBA this week voted to keep its benchmark rate unchanged at 2.50% and did not characterise A$ as overvalued.

The Japanese yen appreciated against most major rivals through the European session as USD/JPY faded to ¥96.94, EUR/JPY depreciated to ¥132.08, GBP/JPY moved lower to ¥156.44, and CHF/JPY slumped to ¥107.86. As expected, BoJ’s Policy Board kept monetary policy unchanged overnight and will continue to aim to expand the monetary base by ¥60 to 70 trillion annually. Former BoJ official Mizuno this week reported a decision on additional easing measures will not come before Q2 2014 at the earliest. BoJ reported the economy is recovering “moderately,” adding “business fixed investment has been picking up” and “housing investment has also increased.” BoJ officials may be forced to enact additional easing measures following the Abe government’s decision this week to raise the national sales tax to 8% from the existing 5% level, effective April 2014. The ¥5 trillion supplementary budget announced by Abe this week may be insufficient and prompt BoJ to ease more. BoJ also reported it sees economic uncertainties remaining elevated and added it will continue to ease until CPI stabilises at 2%. The Nikkei 225 stock index lost 0.94% today and was off about 5% this week, its fourth largest decline in the previous two years.

The euro was mixed against major currencies through the European session as EUR/USD gained to US$ 1.3631, EUR/GBP strengthened to £0.8446, EUR/CHF came off to CHF 1.2235, and EUR/CAD appreciated to C$ 1.4082. Today’s Eurozone data saw German August PPI at -0.1% m/m and -0.5% y/y while the Eurozone August PPI fell to +0.0% n/n and -0.8% y/y. The Letta government looks like it may have fended off the expulsion of Berlusconi from the Senate. Newly re-elected German Chancellor Merkel is poised to start forming a coalition government. Yesterday’s Eurozone August retail sales numbers printed at +0.7% m/m and -0.3% y/y. S&P affirmed Greece’s credit rating and a “stable” outlook, adding its economy is “rebalancing.” ECB’s Linde called on Spain to meet its deficit goals to remain credible. ECB yesterday kept monetary policy unchanged with its main refinancing rate unchanged at +0.50% and ECB’s Draghi confirmed the ECB is reviewing ways to provide additional liquidity to the financial system, including new LTROs. Excess cash in the Eurosystem has declined from €813 billion in March 2012 to €221 billion this week and has resulted in upward pressure on interbank borrowing costs.

The U.S. dollar lacked direction against its peers through the European session as GBP/USD weakened to US$ 1.6126, USD/CHF fell to CHF 0.8977, USD/CAD bettered to C$ 1.0335, and NZD/USD gained to US$ 0.8318. Fed official Fisher reported the US has saddled the US with a “terrible” debt load. The closure of the US government has postponed today’s release of September non-farm payrolls until at least 11 October and Atlanta Fed’s Lockhart indicated the shortage of US data “would tend to make me somewhere more cautious” about voting to taper QE3. Lockhart added that it “would be very hard to make a decision” about tapering QE3 if the government remains closed until the FOMC’s next policy meeting on 29-30 October. Lockhart’s remarks were echoed by San Francisco Fed’s Williams and Boston Fed’s Rosengren. Fed officials Fisher, Dudley, Lacker, Stein, and Kocherlakota are scheduled to speak later today. Yesterday’s US data releases saw Challenger September job cuts up 19.1% y/y with weekly jobless claims at +308,000 and ISM September non-manufacturing at 54.4, down from the prior reading of 58.6. Credit default swaps on US Treasuries are now around 44bps, the highest level since they traded at 65bps in 2011. The market has also expanded to about US$ 3.4 billion, the highest level since March.

Gold and Silver moved higher through the European session as Gold climbed to US$ 1320.83 and was supported at $ 1314.71 while Silver appreciated to US$ 21.742 and was supported at US$ 21.572. Traders continue to await more of a positive reaction from the Metals complex in response to the ongoing US government shutdown, with some expecting Gold and Silver to appreciate on account of save haven demand the longer the US shutdown continues. Holdings in Gold ETP assets are reported to have declined by 2.7 metric tons yesterday to 1,923.6 tons, the lowest reading since May 2010. Investors have sold a reported 708.4 metric tons in 2013 in response to Gold’s significant sell-off. Gold premiums on the Shanghai Futures Exchange have declined to less than US$ 10/ ounce from more than US$ 40/ ounce in July, an indication the Chinese market expects prices to decline further.

Crude Oil was bid through the European session as Brent futures gained to US$ 108.34 and were supported at $107.86 while WTI futures appreciated to US$ 103.19 and were supported at $102.69. The energy complex is getting a little bit of a boost from Tropical Storm Karen as it is expected to hit the US Gulf Coast this weekend and possible disrupt production facilities. Exxon, Anadarko, Chevron, BP, and Royal Dutch Shell are all paring down operations in the region on account of the storm. Oil traders are increasingly confident the US government shutdown will be short-lived, and are therefore pricing in greater demand for Oil. This week’s EIA reported US crude inventories climbed by 5.5 million barrels last week.