Welcome to Markets 4x4, post delivered daily by 4pm in Sydney detailing the key macro themes from the Asian session.
Here’s what you need to know for Monday, October 30.
Weekend hedges unwound again
We could have cut-and -paste the commentary on market moves last Monday, such were the similarities seen today. Geopolitical hedges put in place before the weekend to protect against an escalation in Middle East tensions were again partially unwound with WTI crude oil experiencing the largest decline, falling over 1%. Gold and bonds were down smalls while US stock future rose between 0.2-0.5%, led by the Nasdaq.
Bondcano alert elevated
Bonds were calm but it’s unlikely to stay that way. Not only does the Bank of Japan (BoJ) announce its October monetary policy decision tomorrow afternoon (yes, even in 2023 the BOJ still doesn’t see the need to announce an official time for the announcement) but the US Treasury will release its quarterly refunding plan on Wednesday, detailing its plans for new Treasury debt issuance. In particular, markets will be scrutinising plans for notes and bond issuance given upward pressure on yields 10-years and longer.
In terms of the BOJ, the only thing increasing faster than benchmark 10-year Japanese government bond yields is the number of media articles floating the risk of either a tweak or total abandonment of the bank’s yield curve control (YCC) program, most of them citing unnamed sources. The latest yarn arrived late Friday from the Nikkei publication, resulting in USD/JPY breaking its uptrend and 10-year JGB yields pushing towards 0.9%, just 10 basis points away from the current BOJ ceiling.
Lows in for AUD/USD?
Australian inflation remains strong. So too is retail spending, based on the September retail sales report released today. A 25 basis point hike from the RBA in November is deemed more likely than not while almost every economic forecaster expects the cash rate will increase to 4.35% on November 7. Externally, while geopolitical risks remain elevated, sentiment towards China appears to have stabilised. Combined, it suggests headwinds for the Australian dollar may be slowly starting to turn around.
Not that it’s anything to get excited about just yet, but the AUD/USD looks to have broken the downtrend it’s been stuck in since July. With strong support located below .6300 and RSI picking up even as fresh lows were hit last week, perhaps the AUD/USD is entering a new phase of sideways trade?
Iron ore breaking out
Gold and crude oil weren’t the only commodities to catch a bid on Friday. Iron ore, too, was flying with Dalian futures breaking to the highest level since April, adding nearly 9% in the space of a week. Given the woes being experienced by Chinese property developers, who just happen to be the largest source of steel demand globally, you’d be forgiven for thinking iron ore would be wallowing near cyclical lows. But not in 2023. Stimulus hopes surrounding the rollout of infrastructure investment in China continue to keep the red dirt levitating for now.
Market of the day: EUR/USD
There have been more convincing bullish breaks from descending channels than the one just seen for EUR/USD, perhaps reflecting that while technicals are working in its favour, fundamentals are yet to confirm.
As seen on the daily, a break of resistance at 1.0635 this time last week was snuffed out emphatically at the 50-day moving average, delivering a bearish engulfing candle and retest of support at 1.0525. The subsequent bullish hammer candle, along with a doji candle a day later, points to the likelihood of range-trading in the near-term. Despite the unconvincing price action of late, RSI and MACD continue to suggest downside momentum is slowly turning around.
On the downside, 1.0525 and 1.0483 are the first layers of support. On the topside, 1.0635 and 50DMA at 1.0653 are the levels to watch.
-- Written by David Scutt