EUR Outperforms As JPY Fades While Metals And Oil Seek Direction

The Australian Dollar turned in a mixed performance against major peers through the European session as the AUD/USD strengthened to US$ 0.9403, the EUR/AUD appreciated to A$ 1.4502, the AUD/JPY improved to ¥91.79, and the AUD/CHF gained to CHF 0.8477. Yesterday’s data saw the September performance of service index improve to 47.1 from the prior reading of 39.0. Aussie also found a bid after the release of Chinese data that saw September non-manufacturing PMI improve to 55.4 from the prior reading of 53.9, a fresh six-month high. China is Australia’s largest trading partner. HSBC increased its 2013 Chinese GDP growth forecast to 7.7% from the prior 7.4% reading. The markets are now pricing in about a 47% chance RBA will reduce its benchmark rate to 2.25% or lower at the 4 February RBA meeting. RBA this week voted to keep rates unchanged and did not characterise the A$ as overvalued, breaking with recent practice. In contrast, the markets are signaling a 91% chance the RBNZ is expected to raise its benchmark lending rate to 2.75% or more by June. RBNZ Governor Wheeler published an article on RBNZ’s website that predicts RBNZ will raise its benchmark rate to about 4.5% by early 2016 from the current 2.5% level. Wheeler reported “We are keen to see house-price inflation moderate significantly. If the loan-to-value speed limit is unable to slow house-price inflation, larger increases in the official cash rate would be required.”

The Japanese yen depreciated against major rivals through the European session as USD/JPY climbed to ¥97.77, the EUR/JPY appreciated to ¥133.02, the GBP/JPY moved higher to ¥158.71, and the CHF/JPY rallied to ¥108.50. BoJ’s Policy Board convenes today and tomorrow and is expected to keep monetary policy unchanged with the central bank continuing to purchase ¥7 trillion of bonds monthly to overcome deflation. Former BoJ Policy Board Mizuno indicated BoJ is likely to keep policy unchanged until at least Q2 2014. Prime Minister Abe’s failure to announce a reduction in the corporate tax rate is also contributing to the JPY’s weakness and the Nikkei 225 stock index came off 0.09%. Japanese data today showed Japanese investors purchased a net ¥672.1 billion of foreign bonds and notes in the week ended 27 September.

The Euro outperformed against major currencies through the European session as the EUR/USD gained to US$ 1.3622, the EUR/GBP strengthened to £0.8388, the EUR/CHF moved higher to CHF 1.2267, and the EUR/CAD jumped to C$ 1.4056. As expected, the ECB kept its main refinancing rate unchanged at +0.50% yesterday. ECB President Draghi has instructed an ECB panel to review options for new bank funding measures, including new long-term refinancing operations and additional instruments. Draghi yesterday reported “nobody wants to have a liquidity accident standing between now and a recovery.” 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. Eurozone services PMI data will be released today and are expected to evidence the best performance since June 2011. Moody’s reported Cypriot banks may require capital injections beyond rescue funds from the EU.

The U.S. dollar was mixed against its peers through the European session as GBP/USD weakened to US$ 1.6205, the USD/CHF fell to CHF 0.8998, the USD/CAD came off to C$ 1.0316, and the NZD/USD gained to US$ 0.8339. Boston Fed’s Rosengren yesterday reported the Fed voted to not taper QE3 a couple of weeks ago because growth remains lower than forecast and fiscal policy poses a risk to the economic outlook. Fed Chairman Bernanke yesterday reported the US economic recovery has been “frustratingly slow” and did not comment on monetary policy. Many Fed speakers including San Francisco’s Willams, Dallas’s Fisher, Governor Powell, and Atlanta’s Lockhart will speak today. USD has moved to eight-month lows against the Euro as a result of the closure of the US government and pending breach of the US debt ceiling around 17 October. It is estimated that a one-week shutdown of the US government will likely reduce the GDP by about 0.1%. President Obama and congressional officials convened last night but no progress was announced. Benchmark US Treasury yields continue to decline and the 10-year Note is now trading around 2.6%. Yesterday’s US data saw a moderation in the ISM New York index to 53.6 in September from the prior reading of 60.5. Weekly initial jobless claims numbers will be released today but September non-farm payrolls data will not be released tomorrow if the US government remains closed. ADP data revealed US companies added 166,000 jobs in September, up from a downwardly revised 159,000 print in August.

Gold and Silver lost ground through the European session as Gold fell to US$ 1309.29 and was capped at $ 1316.79 while Silver depreciated to US$ 21.624 and was capped at US$ 21.789. After declining about US$ 40 on Tuesday, Gold retraced losses yesterday and added about US$ 28 to market value with Silver adding about US$ 0.59. The volatility in the Metals complex evidences market forces including declining demand for Gold and Silver and the closure of the US government. Some traders expect Gold’s traditional safe haven appeal will materialise the longer the US budget impasse and government closure lasts. Holdings in Gold bullion exchange-traded products have been reduced by about 705.7 tons this year to a three-year low around 1,926.2 tons. Malaysia announced its first gold futures contract will begin trading on 7 October.

Crude Oil was muted through the European session as Brent futures fell to US$ 108.06 and were capped at $108.26 while WTI futures slumped to US$ 103.30 and were capped at $103.59. EIA reported US crude inventories climbed by 5.5 million barrels last week, exceeding estimates of a 2.5 million climb. Volumes in Oil futures trading are said to remain very thin. TransCanada will begin filling its Gulf Coast pipeline with oil soon after its construction is completed, and this may lead to a reduction in crude stockpiles at Cushing, Oklahoma, the delivery point for the NYMEX Oil contract. Cushing stockpiles fell 59,000 barrels last week to 32.8 million. Traders are also eyeing a new low-pressure system in the Caribbean that may become a tropical depression.