USD strength

AUD: RBA hike is a 50-50 affair The Reserve Bank of Australia has had a tendency to surprise markets in recent months. As it prepares to announce monetary policy tomorrow, markets (40% implied probability of a hike) and consensus are split between a 25bp rate increase and a hold after a set of contrasting data in Australia. We agree that the chances of a hike are very close to 50-50: 1Q wage data pointed to more tightening in our view, but April jobs figures were dismal. When April CPI data was released last week and surprised with a jump to 6.8% year-on-year, and Governor Philip Lowe sounded open to all options by reiterating data-dependency, the probability of a June hike jumped again.     In theory, data dependency means that the prospect of a “hawkish hold” or “dovish hike” should not be on the spectrum of possibilities, and even though the shades of central bank communication can admittedly be quite varied and creative (Lowe will speak Wednesday morning), we see tomorrow’s risk event as quite binary for the Australian dollar. A hike could see AUD/USD initiate a move that can take it to stabilise around 0.6700 towards the end of this week; a hold raises the risk of sub-0.6500 lows being tested again soon, even though we think less USD strength can favour stabilisation in the pair regardless of a hawkish surprise by the RBA.

A hawkish hold from the Bank of Canada next week We expect the BoC to leave the policy rate at 4.5% next week, but after stronger-than-expected consumer price inflation and GDP and with the labour data remaining robust we cannot rule out a surprise interest rate increase. The market is pricing a 25% chance of a hike on 7 June, and a hawkish hold should be anough to keep the Canadian dollar supported.   Canadian resilience means a rate hike can't be ruled out The Bank of Canada last raised rates on 25 January and have held it at 4.5% ever since. The statement from the last meeting in April commented that global growth had been stronger than expected and that in Canada itself, “demand is still exceeding supply and the labour market remains tight”. The bank warned that it was continuing to “assess whether monetary policy is sufficiently restrictive and remain prepared to raise the policy rate further” to ensure inflation returns to 2%.   Since then we have had additional warnings from Governor Tiff Macklem that the bank remains concerned about upside inflation risks with the latest CPI report showing a month-on-month increase in prices of 0.7% versus a consensus forecast of 0.4%, resulting in the annual rate of inflation rising to 4.4%. The economy added another 41,400 jobs in April, more than double the 20,000 expected with wages rising and unemployment remaining at just 5%. The resilience of the economy was then emphasised further by first quarter GDP growth coming in at 3.1% annualised, beating the 2.5% consensus growth forecast. Consumer spending was the main growth engine, rising 3.1%.     But we favour a hawkish hold – signalling action unless inflation softens again soon Nonetheless, the BoC accept that monetary policy operates with long and varied lags and continue to believe that “as more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year”. This will help to dampen inflation pressures and with commodity price softening we still believe that inflation can get close to the 2% target by the early part of 2024.   With the US economic outlook also looking a little uncertain, we doubt that the BoC will want to restart hiking interest rates unless it is certain that inflation pressures will not moderate as it has long been forecasting. Consequently we favour a hawkish hold, signalling that if there isn’t clearer evidence of softening in price pressures it could raise rates again in July.     The loonie's resilience can continue The Canadian dollar has been the best G10 performing currency in the past month, largely thanks to its high beta to the US economic narrative and a repricing of Canada’s domestic rate and growth story. These factors have outshadowed crude’s subdued performance in May and some risk sentiment instability.   A hawkish tone by the Bank of Canada at the June meeting is clearly an important element to keep the bullish narrative for CAD alive. As shown below, the recent repricing in Fed rate expectations caused a rebound in short-term USD swap rates relative to most currencies (like the euro), while the USD-CAD 2-year swap rate differential has remained on a declining path also throughout the second half of May.     As long as the BoC does not push back against the pricing for a hike in the summer, we expect CAD to remain supported. Some lingering USD strength in June can put a floor around 1.33/1.34 in USD/CAD, but we expect a decisive move to 1.30 in the third quarter and below then level before the end of the year.  

FX Daily: Jumping on the inflation swing Today’s CPI release in the US is arguably the biggest risk event of the week. This is because it can tilt the balance ahead of a 'toss-up' FOMC announcement tomorrow, and because anything ECB related may well play second fiddle to moves in USD rates. A 0.4% MoM core consensus read should, in our view, allow the Fed to stay on hold, but may not hit the dollar just yet.   USD: Small deviations in core inflation can have huge implications The currency and rates markets approached this week with a very elevated beta to data releases as markets remained on the lookout for hints on the activity and employment outlook ahead of the Fed’s policy announcement tomorrow. Inflation, however, remains the single most important input in the FOMC’s decision-making equation, and today’s CPI numbers for May likely have a make-or-break potential for a 25bp hike tomorrow, which is currently priced in with a 23% implied probability.   The median consensus estimate for the month-on-month core CPI read – which will effectively move markets – is 0.4%, with estimates ranging from 0.3% to 0.5%. A 0.4% MoM print (translating into a 5.2% core year-on-year rate) is also our economics team's call, and one that would in our view allow the majority of FOMC members to favour a hawkish hold over a 25bp hike tomorrow. It would probably take a 0.3% read to price out the residual 23% implied probability of a hike tomorrow, meaning that the dollar does not need to fall much on a consensus print today.   The spectrum of market reaction is much wider in the event of a 0.5% MoM core inflation read. We think the odds would likely swing in favour of a hike tomorrow, and markets could push their implied probability above 50%, sending the dollar higher across the board. The most visible consequence in G10 FX would probably be another jump in USD/JPY (ultra-sensitive to Fed pricing) and a potential break above the 140.90 end-of-May recent highs.   In terms of the headline measure, the consensus is expecting a month-on-month 0.1% change, translating into a slowdown from 4.9% to 4.1% YoY. But it will almost entirely be up to the core rate to drive the market reaction.

Broader market concerns have weighed on the complex, whilst a stronger dollar has only provided further headwinds. However, for oil at least, the fundamentals remain constructive   Energy: Large US crude draws The oil market continues to come under pressure, with Brent falling 1.7% yesterday, following a raft of weaker-than-expected Chinese macro data this week. The latest Fed minutes will not be helping sentiment, with them suggesting that the US Fed may have some more work to do when it comes to monetary tightening. The strength in the USD over much of the week will also be providing further headwinds to the market. As for WTI, it settled below US$80/bbl for the first time since early August. However, whilst there are broader market concerns, oil fundamentals remain largely constructive as continued OPEC+ supply cuts should ensure that we see sizeable inventory draws for the remainder of the year.  The EIA’s weekly inventory report was largely constructive, showing that US commercial crude oil inventories fell by 5.96MMbbls over the last week.  This leaves crude oil inventories at a little under 440MMbbls, which is the lowest level since the start of the year. Crude oil inventories at Cushing fell by 837Mbbls, leaving them at 33.8MMbbls- levels last seen back in April. The large draw in commercial inventories was largely driven by a rebound in crude oil exports, increasing 2.24MMbbls/d WoW. Refiners also increased their run rates by 0.9pp over the week to 94.7%. Although despite stronger refinery activity, gasoline inventories still fell by 262Mbbls, whilst distillate stocks grew by 296Mbbls. Labour talks in Australia look as though they will roll into next week in an attempt to avoid strike action at several LNG facilities after there was no breakthrough in negotiations earlier this week. Reports suggest that talks will continue next Wednesday. The fact that talks are expected to continue next week has provided some comfort to the market, with TTF settling  2.65% lower yesterday. For Europe, given the comfortable storage situation (90% full), we would need to see a large amount of the roughly 41mtpa LNG capacity at risk, disrupted for a prolonged period, in order to be overly bullish for prices.

Metals - Gold struggles The gold market remains under pressure, with spot prices now trading below US$1,900/oz. The realisation that we are unlikely to see the Fed start cutting rates this year has weighed on gold. In fact, recent US macro data suggests that there is still the possibility that the Fed may have more work to do when it comes to monetary tightening. We could see some volatility later this week in gold prices with Jerome Powell set to talk at Jackson Hole on Friday, possibly providing some insight on Fed policy for the remainder of the year. Higher rates have seen 10 year real yields hit their highest levels since 2009 recently, and they continue to edge closer towards 2%. The stronger rate environment combined with USD strength is certainly not proving supportive for gold. ETF holdings in gold have seen 12 consecutive weeks of outflows - over this period we have seen outflows of around 4moz, leaving total ETF gold holdings at around 90moz. Speculators also reduced their net long in COMEX gold by  29,042 lots to 46,540 lots over the last reporting week. The latest trade data from China Customs show that imports of unwrought aluminium and products rose 20% YoY to 231.5kt in July. This leaves cumulative imports over the first seven months of the year at 1.43mt, up 12.2% YoY. On the export side, alumina exports jumped by 266% YoY to 130kt last month, while YTD exports have risen by 16% YoY to 700kt. This increase is driven largely by stronger flows to Russia.

Metals - Gold struggles The gold market remains under pressure, with spot prices now trading below US$1,900/oz. The realisation that we are unlikely to see the Fed start cutting rates this year has weighed on gold. In fact, recent US macro data suggests that there is still the possibility that the Fed may have more work to do when it comes to monetary tightening. We could see some volatility later this week in gold prices with Jerome Powell set to talk at Jackson Hole on Friday, possibly providing some insight on Fed policy for the remainder of the year. Higher rates have seen 10 year real yields hit their highest levels since 2009 recently, and they continue to edge closer towards 2%. The stronger rate environment combined with USD strength is certainly not proving supportive for gold. ETF holdings in gold have seen 12 consecutive weeks of outflows - over this period we have seen outflows of around 4moz, leaving total ETF gold holdings at around 90moz. Speculators also reduced their net long in COMEX gold by  29,042 lots to 46,540 lots over the last reporting week. The latest trade data from China Customs show that imports of unwrought aluminium and products rose 20% YoY to 231.5kt in July. This leaves cumulative imports over the first seven months of the year at 1.43mt, up 12.2% YoY. On the export side, alumina exports jumped by 266% YoY to 130kt last month, while YTD exports have risen by 16% YoY to 700kt. This increase is driven largely by stronger flows to Russia.

The Commodities Feed: Iranian oil flows edge higher The oil market continues to face headwinds, both on the macro front and on the back of expectations of supply increases. Meanwhile, the natural gas market could see further volatility over the coming days with a deadline for labour talks at some LNG facilities approaching.   Energy - Deadline Day for some Australian LNG talks The rally in oil appears to have run out of steam for now. China's macro issues, along with a growing expectation that maybe the US Fed is not done with its tightening cycle have weighed on oil more recently. In addition, the broader strength in the USD will be providing some headwinds. Fundamentally, the outlook for the market is still constructive with large deficits to persist for the remainder of the year. However, there is some noise around growing supply, specifically from Iran. Iran has quietly increased its output by around 400Mbbls/d over the last year to a little over 2.9MMbbls/d, which is the highest level since late 2018. Iran has said that it will look to increase output to around 3.4MMbbl/d by the end of summer, which would leave it close to pre-sanction levels of 3.8MMbbls/d. Given much of the focus has been on Russian flows since the war, Iran has taken advantage of this to increase oil exports. This comes against the backdrop of apparently greater willingness between the US and Iran to improve diplomacy, evident with a recent deal for a prisoner swap and the release of frozen Iranian funds. There is also further noise around the potential restart of Iraqi oil flows via the Ceyhan export terminal in Turkey. The flows were halted back in March after a court ruled in favour of the Iraqi government, which claimed that these oil flows from the Kurdish region were happening without its consent. Iraqi and Turkish officials have been meeting this week with the hope of resuming the roughly 500Mbbls/d of crude oil that flows via this route. API numbers released overnight show that US crude oil inventories fell by 2.4MMbbls, slightly less than the roughly 3MMbbls draw the market was expecting. Crude oil stocks at Cushing continue to decline, having fallen by 2.1MMbbls over the week. For refined products, gasoline inventories grew by 1.9MMbbls, while distillate stocks edged lower by 153Mbbls. The more widely followed EIA report will be released later today. Natural gas markets should get more clarity around Australian LNG supply over the next 24 hours, given that end-of-day Wednesday is the deadline that workers at Woodside’s North West Shelf gave to come to a deal. As a result, we could see further volatility in natural gas prices for the remainder of the week. We should also get more clarity on how negotiations at Chevron’s Gorgon and Wheatstone are developing later this week.  

GBP: Broadbent speaks tomorrow at Jackson Hole Ben Broadbent is the only Bank of England member speaking at Jackson Hole, but his remarks are scheduled for tomorrow, so we’ll need to wait for Monday to see any impact on sterling. The recent volatility in the BoE peak rate expectations on the back of data releases (wages, inflation, retail sales, PMIs) means the return of some BoE comments after a long period of silence can definitely move the market. It’s worth noting, however, that UK markets are closed on Monday for a national holiday so volumes will be thinner. For today, the pound will be moved by Powell and Lagarde. We think Cable should find good support around 1.2500 in the event of more USD strength, while EUR/GBP can extend its rally beyond 0.8600 if we are right about Lagarde sounding hawkish today.

Oil prices have strengthened over the summer as fundamentals tighten, whilst natural gas prices have been volatile, with potential strike action in Australia leading to LNG supply uncertainty. Chinese concerns are weighing on metals, but grain markets appear more relaxed despite the collapse of the Black Sea deal.   Oil market tightness to persist Oil prices have strengthened over the summer, with ICE Brent convincingly breaking above US$80/bbl. The strength in the flat price has coincided with strength in time spreads, reflecting a tightening in the physical oil market. OPEC+ cuts, and in particular additional voluntary cuts from Saudi Arabia, mean that the market is drawing down inventories. We expect this trend will continue until the end of the year, which suggests that oil prices still have room to move higher from current levels. While the fundamentals are constructive, there are clear headwinds for the oil market. Firstly, it is becoming more apparent that the Fed will likely keep interest rates higher for longer and that, along with renewed USD strength, is a concern for markets. Secondly, Chinese macro data continues to disappoint, raising concerns over the outlook for the Chinese economy and what this ultimately means for oil demand. That said, up to now, Chinese demand indicators remain pretty strong. We expect the tight oil environment to persist through much of 2024 with limited non-OPEC supply growth, continued OPEC+ cuts and demand growth all ensuring that global inventories will decline. However, we could see some price weakness in early 2024, with the market forecast to be in a small surplus in the first quarter of next year before moving back into deficit for the remainder of 2024, which should keep prices well supported. The risks to our constructive view on the market (other than China demand concerns) include further growth in Iranian supply despite ongoing US sanctions and a possible easing in US sanctions against Venezuela, which could lead to some marginal increases in oil supply.  

Asia Morning Bites Asian markets digesting Friday's US labour report data and latest property support measures in China.   Global Macro and Markets Global markets: Friday’s soft US labour report got a mixed reception from equity markets, though stocks ended up virtually unchanged on the previous day’s close. Chinese stocks were also mixed, despite new measures to support the property market and the CNY. The Hang Seng fell 0.55%, while the CSI 300 gained 0.7%. Yields on US Treasuries dropped sharply following the labour report, but fully recovered and ended slightly higher. The 10Y yield rose 7.1bp to 4.179%. This feels like an odd move. What also looks a little strange is the USD strength that has taken EURUSD down to 1.0775. We also see USD strength against the AUD, which is down to 0.6452. Cable has dropped to 1.2590 and the JPY, which after strengthening to below 144.50 has weakened back above 146. Asian currencies were fairly range-bound on Friday, though will probably catch up with their G-10 counterparts in early trading today. It is a public holiday (Labor Day) in the US today.   G-7 macro: US payrolls for August rose by 187 thousand, a little more than the 170 thousand expected. But there were a net 110 thousand downward revisions to past months, so the trend growth rate looks a bit weaker than it did. Adding to the general sense that the labour market is finally showing some signs of softening, the unemployment rate rose from 3.5% to 3.8%, and the average hourly earnings rate fell slightly to 4.3%YoY from 4.4% alongside a slight rise in the participation rate. Offsetting the labour market data, the manufacturing ISM index was a bit stronger than expected, though still consistent with the sector contracting.    China:  Cuts to China’s FX reserve requirements on Friday helped the CNY to trade a bit stronger than it has done recently, and there may also have been support from new policy measures to support the property markets in Shanghai and Beijing. However, it is not clear how much additional demand will be generated from lower down payments for properties and encouragement for banks to lower mortgage rates further. It won’t hurt though. Country Garden has won acceptance for its plan to extend payment on its CNY3.9bn onshore bond, though the fate of the USD 22.5mn bond payment due on 6/7 September remains unclear.   What to look out for: Regional trade and inflation data out later in the week Japan monetary base (4 September) Australia Melbourne institute inflation (4 September) South Korea GDP and CPI inflation (5 September) Japan Jibun PMI services (5 September) Regional PMI (5 September) China Caixin PMI services (5 September) Philippines CPI inflation (5 September) Thailand CPI inflation (5 September) Australia RBA decision (5 September) Singapore retail sales (5 September) US factory orders and durable goods orders (5 September) Australia GDP (6 September) Taiwan CPI inflation (6 September) US trade balance and ISM services (6 September) China trade balance (7 September)  Australia trade balance (7 September) Malaysia BNM policy (7 September) US initial jobless claims (7 September) Japan GDP (8 September) Philippines trade balance (8 September) Taiwan trade balance (8 September) US wholesale inventories (8 September)

EUR: EUR/USD looks vulnerable We are increasingly hearing the term 'stagflation' to describe the Eurozone economy. As a growth-sensitive currency, stagflation is bearish news for the euro and was one of the key factors weighing on it at its birth in 1999. Adding to that story is now the supply-driven spike in energy, reviving fears of last summer's negative terms of trade story for the euro. In practice, that meant the eurozone's traditional trade surpluses turned into deficits and the euro got hammered. With natural gas prices still very subdued, this energy story will not hit the euro as hard as last year, but it remains unwelcome. Regarding European Central Bank (ECB) policy, the market prices just a 25% probability of a 25bp hike next week. We think the chances are much higher than that. However, speculative positioning and the energy story leave EUR/USD in a vulnerable position and EUR/USD could easily slip through support at the 1.0700 area in a move to the 1.0635/40 area. Elsewhere in Europe today, we should see the start of an easing cycle in Poland. The move looks well-telegraphed and perhaps should not weigh too much on the zloty. However, the softer EUR/USD story and higher oil prices look to keep the zloty on the back foot near term.

EUR: Trying to survive above 1.0700 into the ECB Our economics team has published its latest preview of next week’s European Central Bank meeting. It's a close call, but we think policymakers will deliver one last 25bp rate hike. As things stand now, markets disagree with this view, pricing in a mere 9bp for September and 15bp to the peak. This means that there will be room for a sizeable rebound in the euro if we are right about the ECB. We had warned EUR/USD would likely be vulnerable into the ECB meeting, and we are indeed seeing more USD strength keeping the pair pressured. It would already be a positive sign for EUR/USD bulls to see the 1.0700 support hold for another session, possibly indicating that could be the bottom into next week’s risk events. The eurozone calendar includes the final read of the second quarter GDP, as well as a number of ECB speakers, who however should refrain from discussing monetary policy given the quiet period before the ECB meeting kicked off today.

It was a weak session in Asia as higher oil prices and UST yields sapped investors’ enthusiasm for risk. UST yields were pushed higher by concerns about US inflation ahead of the August CPI release later today. Indeed, a 10Y UST auction drew its highest yield since 2007. Asian technology shares were also hurt by a weak investor reception of Apple’s launch of its iPhone 15. At the time of writing, most Asian bourses as well as S&P 500 futures were trading in the red. Higher UST yields and risk-off trading led to a modestly stronger USD with the AUD and JPY leading the declines against the USD. G10 FX is trading cautiously and in tight ranges ahead of the US inflation data release later today.   USD: of (headline) inflation and head fakes Ahead of the US CPI data, our US economist is looking for the headline print to reaccelerate to 3.7% YoY in August, up from 3.2% previously (and above the consensus expectation of 3.6%). In contrast, core inflation is expected to slow down to 4.2% YoY in August, down from 4.7% in July. The mix of accelerating headline and decelerating core inflation highlights that the main driver of the latest price developments is the renewed rebound of energy prices. Fed Chair Jerome Powell signalled back in July that the August CPI is the final of the five key data points that will inform the outcome of next week’s policy meeting. In that, we believe that the Fed may decide to look past the revival of cost-push inflation and focus instead on the persistent drop of core inflation. If confirmed, today’s data could therefore confirm market expectations of a Fed pause in September. Turning to the FX market reaction, the USD will likely take its cue from the US rates markets. We further note that while today’s CPI print may not reignite the Fed rate hike expectations, it could still encourage investors to push back on their rate cut expectations and thus boost the USD rate appeal especially if the (headline) inflation print overshoots market expectations. In addition, the safe-haven USD could continue to draw support from the market’s fragile risk sentiment.

EUR: 1.0200 is the outside risk bottom In the article mentioned above, we estimate that an extension of the run in US treasury yields to the 5.0% mark would take EUR/USD to 1.02. That is not our base case, but the ongoing pressure on the euro is clearly not confined to the US rates story. The ongoing re-rating of growth expectations in the eurozone has ultimately come through to the FX market and taking a toll on the common currency. Developments in the US activity story remain much more important, and if signs of weakness emerge across the Atlantic (and markets price in more Fed tightening) we expect a swift turnaround in EUR/USD, but that may not be a story for the near-term. Holding at the key 1.0500 support will be a success for those hoping for that turnaround to happen anytime soon. Today, the eurozone calendar is light until tomorrow’s CPI figures start to come in, and there are no scheduled European Central Bank (ECB) speakers after Austrian hawk Robert Holzmann said it was unclear whether the peak in rates had been reached yesterday. Across the British channel, the economic calendar is also looking empty today, with no scheduled central bank speakers. We continue to flag downside risks to the 1.2000 area in Cable, while EUR/GBP may struggle to hold on to recent gains as sterling’s recent underperformance relative to the euro starts to look a bit overdone now that the big bulk of the Bank of England repricing has happened.

The AUD/USD pair is stuck in the 0.6380-0.6450 range. In general, the current fundamental background allows bulls to expect new price gains, if not for one "but" – the greenback. The US dollar's position is quite strong, and this serves as an obstacle to the development of an upward movement. However, AUD/USD bears are also unable to take advantage of the greenback's strength: as soon as the pair declines into the 63-figure area, sellers take profits, thus impeding the bearish momentum.   In other words, the pair is in a deadlock situation. To develop an upward movement, buyers need to overcome the level of 0.6450 (the Tenkan-sen line on the daily chart), and in order to restore the downtrend, sellers need to push through the support level of 0.6370 (the lower Bollinger Bands line on the same timeframe). Both are challenging tasks, given the current fundamental picture. Traders need a strong informational impetus that will push the pair out of the range – either to the south or to the north. The Federal Reserve's hawkish stance is on the greenback's side. The results of the latest Fed meeting supported the US currency. The central bank updated its dot plot, indicating that it intends to raise interest rates once again by the end of this year, either at the November or December meeting.   Fed Chair Jerome Powell confirmed these intentions, citing the high level of inflation. However, Powell tied future central bank decisions to the dynamics of key inflation indicators. This is why the core Personal Consumption Expenditures Price Index, which will be published on Friday (September 29), may trigger strong volatility among dollar pairs. According to preliminary forecasts, this crucial inflation indicator is expected to decrease to 3.9% YoY, which is the lowest value since September 2021. In such a case, the dollar bulls may come under pressure because the likelihood of a rate hike in November will significantly decrease (at the moment, this probability is around 30%, according to the CME FedWatch Tool). Conversely, if the index starts to gain momentum and goes against forecasts, hawkish expectations regarding the Fed's future course of actions will increase. Take note that inflation could provide support to the aussie. In this case, we're talking about the Australian Consumer Price Index.   The inflation data for August will be published on Wednesday. The market forecast was for a 5.2% increase in the reported period. If the release comes in at least at the forecasted level (not to mention the "green zone"), the Australian dollar could receive significant support. The key point here is that the CPI has been consistently declining for the past three months, reaching 4.9% in July. If the CPI grows, it will be a "warning sign" for the Reserve Bank of Australia.   It's important to recall the main points from the recently published minutes of the RBA's September meeting. The text mentioned that the Board considered two scenarios: 1) a 25-basis-point rate hike; 2) keeping the rate unchanged. In the end, the majority of the RBA officials agreed with the arguments in favor of maintaining the status quo. However, simultaneously, the central bank emphasized that "some further tightening may be required" in the future if inflation proves to be "more persistent than expected." Clearly, the August CPI will be viewed by the market in terms of a potential RBA reaction. If the gauge exceeds expectations, buyers of AUD/USD will have an informational catalyst for an upward movement.     Do recall that the recent Australian labor data was also in favor of the aussie. Unemployment in August remained at the July level (i.e., at 3.7%), despite forecasts of an increase to 3.9%. The employment figure also grew significantly, reflecting an increase of almost 65,000, while the forecast was for an increase of only 26,000. The labor force participation rate increased to 67.0%, which is the highest result in the history of these observations. In addition, Australia's GDP data, which was published in early September, also supported the aussie, although the report was somewhat contradictory.   The country's GDP increased by 2.1% year-on-year in the second quarter. On one hand, this figure shows a downtrend (the result for the first quarter was 2.4%, and for the fourth quarter of 2022, it was 2.6%). On the other hand, experts had forecasted a weaker result for the second quarter, around 1.8% year-on-year. Therefore, the Australian dollar may emerge in the near future.   If Australia's inflation report comes out in the "green zone" (or at least in line with forecasts), and the report on the core PCE index comes out in the "red zone" (or at least in line with forecasts), buyers of AUD/USD may not only test the resistance level at 0.6450 (the Tenkan-sen line on the daily chart) but also approach the next price barrier at 0.6500 (the upper line of the Bollinger Bands indicator on the same timeframe). So, all eyes are on inflation!  

The Commodities Feed: It's all about the yields The ‘higher-for-longer’ narrative for rates is pressuring the commodities complex, while the accompanying USD strength is adding further pressure.   Energy - Steady OPEC output The oil market struggled yesterday. ICE Brent settled a little more than 1.6% lower on the day as rising treasury yields and USD strength proved to be too much of an obstacle for the market. Technically, the Brent December contract still needs to fill the gap left following the November contract expiry on Friday. If that happens, it would take the front-month contract back above US$95/bbl. Preliminary OPEC production data for September is starting to come through. The Bloomberg survey showed that output increased by 50Mbbls/d MoM to 27.97MMbbls/d. Nigeria showed the largest increase over the month. Their supply grew by 60Mbbls/d, while Iran saw a marginal pullback in output of 50Mbbls/d. Output is likely to remain relatively steady over October. Further out, the market will be focused on any sign that Saudi Arabia is starting to unwind its voluntary additional supply cuts. There was a bit more noise yesterday around the resumption of Northern Iraqi oil flows through the Ceyhan pipeline. Turkey has said that flows could resume this week. However Iraqi officials have thrown cold water on the idea, saying that there are still some issues that need to be resolved before this can happen. The pipeline can carry almost 500Mbbls/d of crude oil from the Kurdish region to the Ceyhan export terminal. Flows were suspended back in March after the Iraqi government won an international arbitration ruling, stating that these flows were occurring without approval from the Iraqi government Metals - Gold plunges to seven-month low Gold plunged to its lowest level since March yesterday - edging closer to US$1,800/oz, as treasury yields continued to move higher and the USD also strengthened.  The higher-for-longer narrative has been putting significant pressure on gold, which is leading to a significant reduction in investment appetite reflected by the large declines in gold ETF holdings in recent months. Fed policy will remain key to the outlook for gold prices in the months ahead.

FX Daily: Waiting for the Fed pushback FX markets are consolidating after a few risk-on days. We have seen some strange price action on the back of the RBA's 25bp hike and some mixed Chinese data. For today, it looks like a relatively quiet session, although the focus will be on how aggressively the line-up of Fed speakers wants to push back against the recent weakening of US financial conditions.   USD: Fed speakers will be in focus today FX markets have handed back a little more of their risk-on gains overnight, leaving the dollar marginally stronger. However, US ten-year Treasury yields are still down at 4.65% and last night's release of the Fed's Senior Loan Officers Survey serves as a reminder that credit conditions are tightening and lending growth is weakening – both of which are likely to weigh on the US economy over coming quarters. In quiet overnight developments, what stands out is the strange reaction in AUD/USD to the Reserve Bank of Australia's 25bp hike. The poor performance of AUD/USD may owe to positioning, or perhaps some read that if the RBA needs to restart its tightening cycle after a four-month pause, maybe the Fed does too. Yet, US rates have not moved much, and the Australian dollar also failed to gain ground on slightly better-than-expected Chinese import data. Perhaps the read here is that the market needs a lot more evidence before pushing on with the Fed pause/peak and weaker dollar scenario. Today, the US highlight will be Federal Reserve speakers, which run from 1:30 pm CET for most of the day. At issue will be whether the Fed chooses to push back against the loosening of US financial conditions. Recall that the tightening of financial conditions in mid-October prompted remarks such as the 'term premium is doing the tightening'. Now that these financial conditions have fully reversed that October spike, the Fed will presumably want to re-emphasise the risk of further rate hikes.  Risks look skewed to a mildly stronger dollar today. DXY closing above 105.50 undoes some of last week's bearish work. But from where we stand, it looks like DXY might bounce around in a broad 104.50-106.50 range into year-end.

JPY: Ueda disappoints markets, but April hike on the table The Bank of Japan kept rates unchanged today as widely expected, but disappointed market hawkish expectations. The Bank kept its dovish guidance unchanged (“take additional monetary easing steps without hesitation if needed") which forced markets to abandon speculation of a rate hike in January.   The yen took a hit, falling almost by 1.0% against the dollar after the announcement and press conference by Governor Ueda, but we identified a few changes in the Bank’s assessment of the economic outlook that likely endorse the market’s lingering expectations for a hike in April. In particular, the BoJ noted that private consumption has continued to increase modestly, that inflation is likely to be above 2% throughout the 2024 fiscal year and that underlying inflation is likely to increase. Those statements are aimed at paving the way for policy normalisation in 2024, in our view. We expect the yield curve control to be scrapped in January and a hike to be delivered in April. From an FX perspective, the yen may simply revert to trading primarily on external factors (US rates in particular) after the BoJ ignored market pressure and likely signalled the path to normalisation should be a gradual one. We remain bearish on USD/JPY in 2024, as the oversold yen can still benefit from the end of negative rates in Japan and we see the Fed cutting rates by 150bp, but the pace of depreciation in the pair will be gradual in the near term, and we only see a decisive break below 140 in 2Q24.   ⚠️ Did the #BOJ fall asleep on the $JPY 🖨️ print button or what? 🤭Almost makes you wonder if someone out there is in desperate need of liquidity… 🤔 https://t.co/EdRfXb9vUH pic.twitter.com/z2dN3YVtuH — JustDario 🏊‍♂️ (@DarioCpx) December 19, 2023

Metals – Gold starts 2024 on a strong footing Gold held up relatively well in the first trading day of the year, despite a stronger USD and move higher in US treasury yields. Later this week, the market will be watching US data releases, including jobs data that may influence the Fed’s monetary policy path and could add to gold’s upward momentum. We believe that the Fed policy will remain key to the outlook for gold prices in the months ahead. The precious metal is likely to keep on building on last year’s gains (+13% and a first annual gain in three years) and we expect prices to reach record highs this year on the assumption that the Fed starts cutting rates in the second quarter of the year, the dollar weakens, safe-haven demand continues amid global economic uncertainty and central bank buying remains at high levels.