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Rising tensions in the Middle East triggered a sell-off in riskier assets overnight. Stock markets fell, bonds gained, the USD strengthened, and oil prices spiked. The S&P 500 dropped by 0.8%, while the Euro Stoxx 50 closed 0.9% lower, and the FTSE 100 edged up 0.5%. Meanwhile, the US 10-year Treasury yield declined by 3.2 bps to 3.75%.
Economic data painted a mixed picture. The US ISM manufacturing index held steady at 47.2 in September, indicating the US manufacturing sector remained in contraction for the sixth consecutive month and for 22 of the past 23 months. New orders increased from 44.6 to 46.1, while employment dropped from 46.0 to 43.9. The prices paid index fell by 5.7 points to 48.3, showing that raw material prices declined in September after eight consecutive months of increases. While job openings in August increased to a three-month high, contradicting other reports that suggested a slowdown in demand for workers.
■ USD moved up to 101.4pts overnight because Iran launched missiles into Israel. The Brent crude oil price increased sharply from $US70/brl to as high as $US75.44/brl. Government bonds rallied while equity markets retreated up to 2% in Europe and the US. While the conflict in the Middle East has potential to escalate further, the USD has potential to jump.
■ The US labour data was mixed and consistent with FOMC cutting its Funds rate by 25bp next month. The job vacancy rate increased back to 4.8% in August though the downtrend is still intact. The quit rate – an indicator of wage growth – decreased below 2.0% for the first time since May 2020. But the layoff rate remains very low at 1.0%. The manufacturing ISM remained weak as expected in September at 47.2pts. However, the employment component was much weaker than expected at 43.9pts. The ADP private employment change is tonight’s highlight (10.15pm Sydney time). A solid 125,000 increase is expected by US economists.
■ AUD/USD lost ½ US cent to as low as 0.6860. The fall in AUD/USD is small compared to the fall in equity markets and the jump in oil prices. AUD/USD is vulnerable to further losses if market participants reassess the global economic outlook because of the conflict in the Middle East. AUD/USD has been supported by optimism about a ‘soft landing’ in the US economy and the Chinese government’s efforts to support domestic demand. However, we are cautious about further large gains in AUD based on hopes of a large Chinese budget stimulus. And the US election is a downside risk to AUD/USD too – see chart of the day below.
■ AUD/JPY briefly poked its head above 100 before retreating below 98.50. The conflict in the Middle East is a major potential weight on AUD/JPY. Watch indicators of risk aversion such as the VIX and currency implied volatility for a steer to AUD/JPY.
■ AUD/EUR continued its recovery overnight despite the tumult in the Middle East. Eurozone core CPI inflation eased to 2.7%/yr as expected by economists. The Overnight Indexed Swap market is increasingly confident the European Central Bank will deliver a string of 25bp cuts over the next six months.
■ AUD/CAD eased back below 0.9300. CAD benefits from high oil prices more than AUD because Canada is a larger oil and gas producer than Australia.
■ AUD/NZD lifted modestly despite a 3% increase in whole milk powder prices at the regular GDT auction. Market participants are increasingly betting on a string of 50bp cuts by the Reserve Bank of New Zealand in coming meetings. The Overnight Indexed Swap market has priced 225bp of cuts by August 2025. By contrast, the OIS market is pricing just 92bp of cuts over the same period. Despite this, AUD/NZD is vulnerable to a step down is the conflict in the Middle East escalates.
Mid-market rates.
| Currency Pair | Mid-market rate |
| AUD/USD | 0.6883 |
| AUD/NZD | 1.0948 |
| AUD/JPY | 98.83 |
| AUD/CNH | 4.8376 |
| AUD/EUR | 0.6220 |
| AUD/GBP | 0.5184 |
| AUD/HKD | 5.3496 |
Chart of the day
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