Overnight geo-political tensions stalls AUD progress for further gains



Good morning


OVERNIGHT DATA AND HEADLINES


• Stocks gained on a report that China could yet agree to a partial trade deal with the U.S. despite recent tensions, while the prospect of a last-minute Brexit agreement between the European Union and Britain seemed as remote as ever. Oil prices rose on trade optimism and after Turkey launched a military operation in northern Syria.

• Latest news : Beijing has lowered expectations for progress from US trade negotiations this week – Chinese officials have lowered expectations for progress from US trade negotiations this week since the goodwill has been damaged by US Commerce Department’s blacklisting of 28 Chinese companies. Washington announced that it would be adding 28 Chinese companies, government offices and security bureaus to a U.S. blacklist over their alleged role in facilitating human rights abuses in China's Xinjiang region.

• Most Federal Reserve policymakers supported the need for an interest rate cut in September but they remain increasingly divided on the path ahead for monetary policy. The readout of the meeting also showed that the Fed agreed it would soon need to discuss whether to increase the size of its balance sheet following ructions in short-term money markets. Fed policymakers at the Sept. 17-18 meeting decided, in a 7-3 vote, to lower the benchmark overnight lending rate by a quarter percentage point to between 1.75% and 2%.

• Fed Chair Jerome Powell flagged openness to more rate cuts overnight to mitigate against such risks, repeating that the central bank will act "as appropriate." Also stating the Fed would "soon announce measures to add to the supply of reserves over time" and emphasised allowing the balance sheet to grow again should not be read as an effort to stimulate the economy, but rather to meet the public's demand for cash and bank demand for reserves.

• Wall Street rose for the first time in three sessions with technology stocks providing a boost, as a report that China was open to a partial trade deal soothed investor nerves ahead of high-level talks on Thursday. Dow Jones up 165.11 points (0.63%) at 26,329.15, S&P 500 up 23.37 points (0.81%) at 2,916.43 and Nasdaq up 76.71 points (0.98%) at 7,900.49.


CURRENCIES


• The U.S. dollar index was 0.06% lower at 99.12 as markets awaited the release of the U.S. Federal Open Market Committee's minutes from its September meeting.

• EUR trimmed Tuesday’s losses, rising back up from 1.0945 lows to test 1.0990 but fell back lower towards 1.0970.

• GBP continued to pressure the 1.2200 support level overnight trading just ahead of the level.

• CNY traded down, up and back down as U.S.-China tensions rose ahead of high-level trade talks. It opened at 7.1530, fell to 7.1190 and rose back up to 7.1315.

• AUD initially rose towards 0.6750 however fell late into NY close down towards 0.6721.

• NZD mirrored AUD price action, rising up towards 0.6320 however fell back to 0.6290.

• AUDNZD made small gains higher towards 1.0690 (from 1.0660)

• AUDEUR fell back towards 0.6120 from 0.6150 on a strengthened EUR.

INTEREST RATES

• Long-dated Treasury yields rose ahead of large auctions this week – a $24 billion reopening of 10-year notes on Wednesday and a $16 billion reopening of 30-year bonds on Thursday - as increases in supply drive prices lower.

• The benchmark 10-year yield rose 1.7 basis points to 1.556%, steepening the yield curve. That spread was last at 13.3 basis points, reapproaching the 2 month high last week.

• The 30-year bond yield was up 4 basis points ahead of Thursday's auction.


COMMODITIES

• Gold eked out gains on bets of further U.S. Federal Reserve rate cuts following the release of minutes from the central bank's September policy, but hopes of a Sino-U.S. trade deal buoyed risk sentiment and capped bullion's gains. Spot gold was up 0.2% at $1,507.52 per ounce but later traded down to $1,505.

• China's steel futures eased for a second day as a sluggish real estate market weighed on the demand outlook, while a pick-up in steel inventory last week also weighed. Property sales in Beijing during the week-long holiday between Oct. 1 and Oct. 7 were down, with new home sales registered with the government reaching the lowest level since 2014. Prices for spot cargoes of benchmark iron ore with 62% iron content for delivery to China stood at $94 a tonne on Tuesday, flat from Sept.30. Stainless steel for February delivery edged up 0.2% to 15,675 yuan a tonne.

• Copper held steady before high-level talks between China and the U.S. - Benchmark LME copper ended up 0.1% at $5,684 a tonne.

• Oil prices edged up as Turkey launched an offensive in Syria that could disrupt crude production in the region and on hopes of progress in ending the U.S.-China trade war, but a build in U.S. crude inventories limited gains. Brent crude was up 19 cents at $58.43 a barrel and U.S. West Texas Intermediate crude was at $52.77, up 14 cents.


EVENT RISK TODAY


• Australian Economic data today : August housing finance (market expecting +2.3%, down from July’s 4.2%). Moderate gain in number of owner occupier approvals expected.

• NZ : Sep REINZ house sales / prices

• Japan : August machinery orders (manufacturing in a slump)

• Germany : August trade balance

• U.S. : September CPI (0.1% expected. Core to rise 0.2% in month)

• Canada : August new housing price index.


AUD thoughts :


AUD initially capitalised on the positive US-China trade headlines trading near 0.6750 highs however late geo political risk events (Turkey launch of a ground assault on Syria and China lowering expectatoins for U.S. trade talks) saw it back towards low 0.6720’s late in NY closing. Adding to the fall was stronger U.S. interest rates, firmer USD and weaker CNY.


Yesterday in Australia we saw the Westpac-Melbourne Institute Index of Consumer Sentiment falling 5.5% to 92.8 in October from 98.2 in September. This was the lowest level of the index since July 2015. The Index had fallen by 8.4% since the Reserve Bank started cutting rates in June and is down by 8.6% over the last year. The fall came despite a further 25bp cash rate cut from the RBA at its October meeting – the third rate cut since June taking the cash rate to a new historical low of 0.75%.


Today in Australia we have August housing finance figures to digest. The big play tonight will be in the U.S. September CPI release – after the PPI data expect CPI to come out at 0.1% with risks tilted more downside. The ongoing global events continue to wreak havoc with markets - deteriorations in US-China trade relations continue to weigh on the global economy amid speculation of a recession in the US.

Technical outlook :

AUD bulls try to defend key short-term Fibo – AUD slips toward 50% Fibonacci (0.6722) of the 0.6670-0.6774.

Bulls need support near 0.6720 to hold in order to maintain some control. Technical signals not clear for now, consolidation of recent gains might persist. RSI’s languish toward downside. Should AUD fall further target 0.6700 psychological support followed by 0.6670. Resistance clearly evident through the cluster of moving averaged between 0.6774 / 0.6784.




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