Welcome to our daily market update, where we help keep you informed on the latest happenings in the world of FX.If you have any questions or would like anything further explained, please don’t hesitate to reach out to your account manager or email info@cafx.com
Equities moved higher as the latest economic data didn’t significantly impact expectations for Fed rate cuts. Most major sectors in the US market saw gains, with both large and small caps outperforming the broader index. The S&P 500 rose by 0.8, while the Nasdaq 100 gained 1.0%. The “Magnificent Seven” mega-cap stocks advanced 1.5%. In Europe, the Euro Stoxx 50 increased by 1.1%, and the FTSE 100 closed 0.6% higher. The yield on the US 10-year Treasury inched up to 3.67%.
US core PPI rose by 0.3% last month, slightly above the expected 0.2%, while the annual core figure matched forecasts at 2.4%. This mirrored the CPI data earlier in the week, with a small uptick in the monthly core reading. However, any market reaction to the PPI data was muted due to downward revisions from the previous month.
US futures shifted to slightly higher odds of a 50bps Fed rate cut next week, following a Wall Street Journal report by Nick Timiraos, known as “The Fed Whisperer,” which suggested that policymakers are debating between a 25bps or 50bps reduction. The mere mention of a 50bps cut has left markets rethinking what seemed to be a more certain 25bps cut. There’s now a good chance the Fed might opt for 50bps, making it feel more like a coin toss.
The USD has gradually weakened following the release of US PPI data, with the US dollar index (DXY) set to end its 4-day winning streak.
■ AUD/USD lifted modestly to 0.6720, not far from our end‑quarter forecast of 0.6700. Higher commodity prices and equities supported AUD against most currencies. With no important economic data released in Australia or in the major economies today, we expect AUD/USD to trade in a tight range near current levels. Next week could be a big week because the FOMC is expected to start an interest rate cutting cycle.
■ USD eased modestly overnight, mainly against EUR, GBP and AUD, despite modestly higher US interest rates. The US producer price index (PPI) was slightly stronger than expected in August. However, upstream price pressures remain weak in the US and are not a threat to the FOMC starting an interest rate cutting cycle next week. Healthcare prices in the PPI, closely correlated with the dominant healthcare prices in core PCE inflation, increased by only 0.1%/mth. Despite the weak price pressures, initial claims for jobless insurance remained low at 230,000 last week. The scene is set for the FOMC to cut the Funds rate by 25bp rather than 50bp next week in our view. With volatility falling, global equities elevated, and interest rate cuts brightening the outlook for the world economy, the USD can continue to drift lower in coming months.
■ AUD/EUR was choppy overnight following the European Central Bank’s (ECB) policy meeting. As was widely expected, the ECB cut its deposit interest rate by 25bp to 3.50%. In addition, the ECB also cut its other policy interest rates by 60bp to 3.65% (main refinancing rate) and 3.90% (marginal lending facility) respectively. The implication is the spread between the deposit rate, and the MLF and main refinancing rates narrowed by 35bp as flagged by the ECB.
■ In line with our guidance in the Weekly FX Strategy and Dailies, European interest rates increased because ECB President Lagarde was non‑committal about a follow‑up cut at the ECB’s next meeting on 17 October. Between now and the next meeting, only the CPI and PMIs will be released among the key economic data. We expect the ECB to cut again in December, by 25bp. Our prediction of a global economic recovery because of interest rate cuts will help AUD/EUR to increase further in coming months.
■ AUD/JPY consolidated near 95.3 despite solid increases in US and European equity markets. A Bank of Japan (BoJ) board member, Tamura, made hawkish comments yesterday. Tamura said there is a need to raise the policy rate to 1% (from 0.25%). We also expect the BoJ to eventually increase its policy interest rate to 1.0%.
■ AUD/CNH should remain near current levels today. However, the monthly Chinese ‘data dump’ is released tomorrow; yes, Saturday! A downside surprise is the clear risk to the Chinese economy because policy support is not gaining traction. Therefore, AUD/USD and AUD/CNH could open weaker in early Monday morning trade that is often illiquid.
Mid-market rates.
| Currency Pair | Mid-market rate |
| AUD/USD | 0.6731 |
| AUD/NZD | 1.0871 |
| AUD/JPY | 95.04 |
| AUD/CNH | 4.7830 |
| AUD/EUR | 0.6071 |
| AUD/GBP | 0.5120 |
| AUD/HKD | 5.2505 |
Disclaimer:
The market update provided by Corporate Alliance FX (CAFX) is for reference only and does not constitute a bid, levy, offer or invitation to offer for the financial product, the basis for any contract or commitment, a recommendation for the purchase or sale of any investment instruments, financial, legal, tax, investment advice, investment advice or other opinions. It will not be legally liable for any consequences or losses caused by the information or content involved.
Corporate Alliance Group Pty Ltd T/A Corporate Alliance FX (CAFX) (ABN 58 167 119 226, AFSL 523351) (i.e. CAFX), CAFX independently holds the Australian Financial Services licence no. 523351 (AFSL), so CAFX is regulated by the Australian Securities and Investment Commission (ASIC) and, and although ASIC is a strictly regulatory body, it does not endorse a specific financial product. ASIC’s regulation of CAFX applies to all services under the financial licence held by CAFX, including the issuance of foreign exchange settlement, foreign exchange payments, foreign exchange risk control, hedging, market making and providing financial advice.
