Dollar Rally

Danske Bank

Commodity

Economic

Stocks

Bond

Forex

Summary:

In Sweden, we receive a string of data points including trade balance figures, NIER confidence survey, and household lending growth.

Today focus will be on U.S. durable goods orders and euro area M3 money supply growth. Consensus expects that durable goods orders fell 0.5% m/m in august and that euro area M3 money growth will dive further into negative territory. While much of the decline in the money supply is due to base effects from quantitative tightening (QT), we have also seen a continued weakening in credit to the private sector. This should naturally be seen in light of the tightening monetary policy stance.

In Sweden, we receive a string of data points including trade balance figures, NIER confidence survey, and household lending growth.

ECB

Governing council member Robert Holzmann yesterday said that he thought it was unclear whether the policy rate had peaked due to persistence in inflation, i.e. raising the possibility that the ECB may have to hike further.

Japan

Minutes from the July Bank of Japan meeting revealed that most members did not think achievement of inflation goal was in sight, while one member thought it might be possible to assess whether the target was hit in Q1 next year.

Gold

The gold price has held up relatively well amid rising bond yields and rebound in the USD. However, this week it has started to give in and yesterday it fell to the lowest level in over a month.

Equities

Equities were lower for another session, thereby reversing some of Monday's modest gains. S&P 500 dropped a full -1.5% and Stoxx 600 -0.6%. Nasdaq is now only a percentage point away from a full correction the last month. Yields continued to govern the direction of equities. As such, yield sensitive groups of stocks underperformed, like utilities and tech (Vestas, Evolution, Orsted). Unlike Monday, this was a risk off session. VIX rose and is now inches away from the important 20-level. Defensives outperformed cyclicals, with energy, consumer staples and health care holding up (Novo Nordisk, Genmab and Sampo in the Nordics). Pulp names also against the stream, with SCA and Stora Enso up about 1%. U.S. futures are turning around this morning though and Asian markets are mixed.

Yields to stay higher and potential advancement of the PEPP reinvestments sparked another "higher yield and wider spreads"-reaction. Fed's Kashkari said that rates could probably go higher while ECB's Holzmann said that they hopefully can discuss PEPP soon. Holzmann added that he would not favour outright APP sales. That combined the German finance agency revised Q4 issuance plans lower led to an outperformance of core yields. Reports of potential Italian budget deficits above 4% (initial 3.7%) weighed heavily on the BTPs, where 10y BTPs-Bund spread widening 7bp to 192bp which is the widest since March. Today the TLTROs repayment settles, with EUR101bn repaid. This will reduce the excess liquidity by roughly the similar amount.

Another strong day for the USD, with USD/JPY challenging new highs and EUR/USD moving further below 1.06. Thus far into the week however, SEK outperforms rest of G10 (inc. USD) and USD/SEK broke below 11.00 yesterday, despite another sour day for risk. Neighbouring NOK does not follow suit however, and instead EUR/NOK continues to trade within the 11.40-50 interval.

Credit

Credit markets took a sharp leg wider yesterday where iTraxx Xover widened almost 12bp and Main almost 3bp. The cautious tone was also visible in the primary market where activity was subdued.

Nordic macro

In Sweden various statistics drop today. Trade balance figures is first out (CET 8:00). It has been suggested to be one of the major contributors for the eventual decline in Swedish growth. However, as the July numbers bounced back upwards it is of interest if the statistic will further strengthen the improving trend. We also get household lending growth figures which may be bottoming out which we hope these numbers will signal.

Then we have the NIER confidence survey (CET 9:00). It includes price plans for the retail and service sector which are still above levels that are not in accordance with the inflation target. Furthermore, it also includes labour market indicators which is of relevance to see if the increase in the unemployment rate in August were indicative or only a deviation.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Samantha Luan

Commodity

Economic

Central Bank

Forex

Amid the backdrop of surging treasury yields, Dollar has pressed on, extending its recent rally. The mounting sentiment of risk aversion has provided additional tailwinds for the greenback, especially after the DOW experienced its sharpest decline since March. For now, Yen emerges as the day's runner-up in strength, shadowed closely by Canadian Dollar. Conversely, Australian and New Zealand Dollars trail behind. Euro and Sterling are holding their ground in a muddled middle, their positions buffered to some extent by Swiss Franc's selloff.

From a technical standpoint, Dollar's might against commodity currencies appears to be held in check. For the greenback to truly showcase its dominance, it would necessitate AUD/USD to decisively break 0.6356 support level. Similarly, NZD/USD would have to pierce 0.5858 support to reinitiate its recent down trend. At the same time, USD/CAD will need to break through 1.3548 resistance to confirm complete of its near term pull back from 1.5693. Attention is now on whether the Dollar can achieve these milestones before the close of September. Dollar Rally Continues with Tailwinds from Risk Aversion_1

Dollar Rally Continues with Tailwinds from Risk Aversion_1

In Asia, at the time of writing, Nikkei is down -0.18%. Hong Kong HSI is up 0.54%. China Shanghai SSE is up 0.19%. Singapore Strait Times is down -0.82%. 10-year JGB yield is down -0.001 at 0.745. Overnight, DOW dropped -1.14%. S&P 500 dropped -1.47%. NASDAQ dropped -1.57%. 10-year yield rose 0.016 to 4.558.

Australia's monthly CPI rose to 5.2%, led by housing and transport

Australia CPI for August rose from 4.9% yoy to 5.2% yoy, in line with market expectations.

Digging into the specifics, the sectors showing the most substantial annual gains were housing, which surged by 6.6%, followed by transport at 7.4%. Additionally, food and non-alcoholic beverages reported an increase of 4.4%. Notably, insurance and financial services marked the highest significant rise of 8.8%.

On the other hand, when considering CPI that excludes volatile items such as holiday travel, there was a slight dip from 5.8% yoy to 5.5% yoy. Meanwhile, the Annual trimmed mean CPI, which gives a clearer picture by removing the most volatile items, remained steady at 5.6% yoy.

BoJ minutes reveal diverging views on future policy direction

The minutes from BoJ meeting held on July 27 and 28 have unveiled differing perspectives among board members regarding the future direction of monetary policy. While a consensus was apparent on the immediate need to sustain ultra-low interest rates, members were divided on how to approach the medium to long term.

One member stated, "there was still a significantly long way to go before revising the negative interest rate policy, and the framework of yield curve control needed to be maintained".

The same member emphasized the importance of patience and consistency, suggesting that "it should carefully nurture the long-awaited signs of change in firms' behavior by patiently continuing with monetary easing."

Another participant weighed the risks of delaying versus hastening monetary tightening. In their perspective, the "risk of missing a chance to achieve the 2 percent target due to a hasty monetary tightening outweighed the risk of the inflation rate continuing to exceed 2 percent if monetary tightening fell behind the curve."

Yet another member presented a more optimistic outlook on the inflation target, noting that the "achievement of 2 percent inflation in a sustainable and stable manner seemed to have clearly come in sight." They further suggested that between January and March 2024, it might be feasible to evaluate the Bank's success in achieving the inflation target.

Despite the differences in outlook, BoJ decided to persist with its current easing policy settings but also opted to grant long-term borrowing costs more flexibility to rise.

Gold at 1900 key support zone as selloff intensifies

Gold is under intensifying selling pressure this week. The prominent drivers behind this selloff are strengthening Dollar and, crucially, surging treasury yields. As a result, the yellow metal finds itself back at a crucial support zone around 1900 mark.

Within this critical support region lies 38.2% retracement of 1614.60 (2022 low) to 2062.95 at 1891.68, as well as 55 W EMA (now at 1896.68). A clear break below this pivotal range would underscore the notion that whole rally originating from 1614.60 has completed at 2062.95 already, stopping short of 2020 high of 2074.84. This descent from 2062.95 could then be interpreted as a medium-term fall trend, as one of the falling legs inside the long-term consolidation pattern from 2074.84.

For now, risk will stay on the downside as long as 1947.21 resistance holds. Sustained break of 1884.83 support will pave the way to 61.8% projection of 2062.95 to 1892.76 from 1947.21 at 1842.03 in the near term. 100% projection at 1777.02 and below will be the medium-term target.

Drawing parallels with other markets, the extended decline in Gold, if realized, would be consistent with Dollar Index surging towards 108/110 zone. Dollar Rally Continues with Tailwinds from Risk Aversion_2

Dollar Rally Continues with Tailwinds from Risk Aversion_2

Dollar Rally Continues with Tailwinds from Risk Aversion_3

Looking ahead

Germany Gfk consumer sentiment, Swiss Credit Suisse economic expectations and Eurozone M3 money supply will be released in European session. Later in the day, U.S. durable goods orders will take center stage.

USD/CHF Daily Outlook

USD/CHF's rally continues today and breaks 0.9146/60 cluster resistance. There is no sign of topping yet, and intraday bias stays on the upside. Next target is 0.9439 resistance. On the downside, below 0.9117 minor support will turn intraday bias neutral and bring consolidations, before staging another rally. Dollar Rally Continues with Tailwinds from Risk Aversion_4

Dollar Rally Continues with Tailwinds from Risk Aversion_4

In the bigger picture, sustained trading above 0.9146 cluster resistance (38.2% retracement of 1.0146 to 0.8551 at 0.9160) will argue that rise from 0.8551 is reversing whole down trend from 1.0146. Further rally would then be seen to 61.8% retracement at 0.9537 and above. For now, this will be the favored case as long as 55 D EMA (now at 0.8905) holds. Dollar Rally Continues with Tailwinds from Risk Aversion_5

Dollar Rally Continues with Tailwinds from Risk Aversion_5

Source: ActionForex

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Thomas

Economic

Investor nerves remain frayed over the prospect of interest rates staying higher for longer, with a surge in U.S. Treasury yields pulling the dollar to a 10-month peak and driving Asian currencies, the pound and the euro to their lowest in months.

Resilient economic data, hawkish Federal Reserve rhetoric, and a budget deficit that will require increased borrowing have all combined to push the 10-year yield up more than 40 basis points this month. In Asian hours on Wednesday, short-dated Treasuries rallied while the longer end steadied.

Asian markets were under pressure as the day progressed, with MSCI's broadest index of Asia-Pacific shares outside Japan sliding to its lowest in 10 months. The Nikkei dipped below 32,000 for the first time since Aug. 28.

Futures indicate the sombre mood is likely to continue as Europe wakes, with markets there due to open lower.

Also in the background, another U.S. government shutdown looms. While the Senate on Tuesday took a step forward on a bipartisan bill meant to forestall a shutdown in just five days, the House of Representatives sought to push ahead with a conflicting measure backed only by Republicans.

Congress has shut down the government 14 times since 1981, though most of those funding gaps lasted only a day or two.

China's property sector brought more bad news, this time that the chairman of China Evergrande Group has been placed under police surveillance, according to a Bloomberg News report on Wednesday. That ratchets up pressure on the embattled developer whose outlook had already darkened significantly this week.

Meanwhile, tech stocks are likely to be in the spotlight after a long-awaited antitrust lawsuit against Amazon.com from the U.S. Federal Trade Commission was filed on Tuesday.

The FTC asked the court to consider forcing the online retailer to sell assets, with the government accusing Big Tech of monopolising the most lucrative parts of the internet.

AI stocks (remember them?) will also be in focus after news that OpenAI, the artificial intelligence startup behind ChatGPT, is talking to investors about a possible sale of existing shares at a much higher valuation compared with a few months ago.

The proposed deal could value Microsoft-backed OpenAI at $80 billion to $90 billion, according to the Wall Street Journal, which first reported on the potential share sale.

And finally, for Candy Crush fans, its maker King said it would soon release levels up to 15,000 for the most dedicated players. It also said the popular game has reached $20 billion in revenue since its 2012 launch. Rate Jitters Wear Down Wary Markets_1

Key developments that could influence markets on Wednesday:

Economic events: German GfK consumer sentiment, Swiss investor sentiment, French consumer confidence

Source: Reuters

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Alex

Forex

Economic

In line with expectations, but more progress needed

At 5.2% YoY, the August inflation figures were bang in line with expectations. However, inflation is rising again, not falling, and the month-on-month and core inflation figures (0.69% MoM and 0.3% MoM respectively) leave no room for complacency. It is still possible that the Reserve Bank of Australia (RBA) will conclude that the trend pace of improvement in inflation is insufficiently fast and that a further hike is required.

Base effects can take some of the blame for the rise in inflation this month. In 2022, the August CPI index rose only 0.3% MoM, so this year's August CPI was always going to have to come in low just to keep inflation steady. It didn't come in low enough. This could be a problem over the coming two months, with September and October 2022 CPI increases also just 0.3% MoM.

Excluding volatile items, the rise in CPI was indeed only 0.3%, but with oil prices rising, and September retail gasoline prices likely to boost the transport component almost as much as it did in August, this is not going to be enough to keep inflation on a downward trend. And that sort of consecutive backsliding in inflation could be exactly the sort of condition that could pressure the Reserve Bank of Australia to respond with some further tightening. This could perhaps occur at the November meeting, after the September (and 3Q23) CPI release, or even in December, when the October inflation figures will be available. Australia: Inflation Back on the Rise_1

Inflation will likely rise again in September

The chart above shows where most of the inflation came from in August. A 9.1% increase in motor fuel prices lifted the transport component by 3.6% MoM. This is likely to be repeated in September, as retail gasoline prices have continued to rise, though it may not be quite so large as indexed excise duties on fuel will not reoccur until February next year.

That same twice-yearly excise duty indexation also means that some other price rises are not likely to be repeated next month. Alcohol and tobacco prices, for example, rose 1.3% MoM in August. With rising inflation, comes a rise in excise duties. That resulted in an August jump in the price of booze and tobacco six months after excise duties were raised in February. But that won't reoccur again until next February, so this component is likely to be much flatter in September.

The housing component is still rising strongly, with rents up 0.7% MoM, the same as July, and only slightly down from their June peak growth of 0.9% MoM. Some moderation over time is probable. But with supply still constrained and strong demand in the face of a rising population, we don't expect much slowdown any time soon.

One factor that was a sizeable drag for a second consecutive month, was recreation. This is a seasonal factor. The end of the holiday season leads to a drop in the prices of hotel room charges and airfares. But it doesn't last. So this month's 3.9% MoM decline in holiday prices, after July's 3.3% decline, is likely to revert to a positive figure in September in line with past trends.

The AUD has taken some comfort from the data

The AUD started the day languishing below 64 cents to the USD, but it has been buoyed by this data, and by the growing possibility of a bit more rate support from the RBA, recovering back above 64 cents. Futures markets are still undecided about the RBA, with very little chance of a rate hike priced in before the end of this year, rising to a peak of about a 66% probability for a further 25bp of tightening, though not until May 2024.

We think that if the RBA is going to hike again, it will need to be this year, as we don't believe the current inflation backsliding will last beyond the year-end. So we'd expect these cash rate futures to start pricing in more tightening sooner over the coming months, as headline inflation continues to go in the wrong direction. That may also provide some additional lift to the AUD, though for that, we also would like to see some generalised USD weakness, and the U.S. inflation and rates story is very similar to that of Australia, so we aren't taking that for granted.

Source: ING

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Thomas

Economic

India will be the fastest-growing major economy this fiscal year, supported by government spending ahead of May's general election, according to a Reuters poll of economists who did say the forecast risks were skewed to the downside.

While Narendra Modi's government increased spending in the past few years to build roads, railways, and other infrastructure, helping India defy the global slowdown trend, it has so far failed to create enough jobs.

Asia's third-largest economy will grow 6.2% in the fiscal year ending in March 2024 and 6.3% next, the same as predicted last month, according to the median forecasts in the Sept. 20-26 poll of 65 economists.

Forecasts for this fiscal year ranged widely from 4.6% to 7.1%.

But most economists said expected growth was still well below potential and a drier than normal monsoon season so far could act as a restraint in an economy where agriculture employs about half the workforce in a country of over 1.4 billion people.

After a stellar 7.8% expansion last quarter, economic growth was expected to moderate to 6.4% this quarter and then drop to 6.0% in the October-December period before slowing to 5.5% in early 2024.

"We all know the big picture story is very positive, but I feel like discussions about economic growth often get lost between the cyclical and the structural and at the moment, we're definitely in a cyclical slowdown," said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics.

"A lot of the drivers that drove the really strong growth from the middle of 2021 to last year have been exhausted. A weak external backdrop is weighing on Indian economic growth as well as sluggish private consumption and sluggish investment."

A majority of economists, 22 of 36, who answered an additional question said the risks to their FY 2023/2024 GDP growth forecasts were skewed to the downside.

RBI's next move?

While the poll showed India's retail inflation would average 5.5% this fiscal year and 4.8% next, above the RBI's medium-term target of 4%, over two third of economists, 23 of 34, said the risks were skewed that it would be higher.

Even though inflation was not expected to reach that goal across the forecast horizon, economists expect the next move from the Reserve Bank of India to be a cut.

Nearly 60% of economists, 28 of 48, forecast the RBI to have cut rates by at least 25 basis points before July with the median putting it at 6.25% in the second quarter of next year.

That's around the time when its global peers were expected to cut rates.

All but one of the 71 economists surveyed said the RBI would keep its key repo rate unchanged at 6.50% at the conclusion of the Oct. 4-6 meeting, with one expecting a 25 basis point hike. Median forecasts showed it staying there for the rest of this fiscal year.

"The RBI will likely tolerate supply-driven inflationary pressures as long as core prices continue to ease but will monitor the development of inflation expectations closely," said Alexandra Hermann, lead economist at Oxford Economics.

"We still expect a rate cut early in 2024, although recent inflationary trends are making it increasingly likely that a policy tilt will be pushed back. Government measures should cool food prices in the coming months, but rising oil prices will likely place upward pressure on headline inflation."

Source: Reuters

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Owen Li

Commodity

Energy

Energy - Gasoil cracks weaken

Despite the heavy sell-off in equities yesterday, along with further strength in the USD, ICE Brent managed to settle a little more than 0.7% higher on the day. The price action suggests that tightening fundamentals are largely driving the market at the moment. Although clearly, external influences will be providing some headwinds to the oil market.

Overnight the API released its latest US inventory numbers. Overall the report was largely neutral with crude oil inventories rising by 1.59MMbbls over the week, while gasoline inventories fell by just 70Mbbls. More supportive numbers from the release were the 1.7MMbbls decline in distillate fuel oil stocks and the 828Mbbls decline in Cushing crude oil inventories. The decline in inventories at the WTI delivery hub continues to see the prompt WTI spread trade into deep backwardation and it is currently trading at over US$1.60/bbl. The more widely followed EIA inventory report will be released later today.

Gasoil cracks have continued to come under pressure this week despite the Russian export ban on diesel and gasoline. The November ICE gasoil crack is holding just above US$30/bbl. The lack of sustained strength in the gasoil market following the announcement appears to reflect expectations that the Russian ban will not remain in place for very long given domestic storage constraints. In recent days we have already seen the Russian government tweaking the ban by allowing the export of low-quality diesel and bunker fuel.

Metals – LME copper spreads widens

LME copper cash/3m spread widened to a record contango of a little more than US$70/t this week (although this narrowed to a little less than US$57/t yesterday) as copper demand in the physical market remains under pressure due to slower industrial activity in China and elsewhere. Tepid demand has led to a significant increase in exchange inventories. LME copper inventories increased to a fresh one-year high of 164kt with inflows of around 110kt since mid-July. Meanwhile, LME data shows that speculative net longs in LME copper dropped by 12,501 lots over the last week with their net long position falling to a 3-month low of 43,441 lots as of 22 September.

The latest data show that China's gold imports from Hong Kong increased to 45.2 tonnes over August compared to around 30.2 tonnes in July as demand for precious metals remains strong in the domestic market. Cumulatively, China's gold imports from Hong Kong increased by 36% YoY to 359 tonnes over the first eight months of 2023. Looking ahead, gold demand in China is likely to have improved further this month as reflected by the high premium for gold in the local market. Shanghai gold currently trades at a premium of around US$100/oz over international prices.

Agriculture – Weaker Ivorian cocoa exports

The latest data from Ivory Coast's Customs Department shows that cocoa exports dropped by around 10% YoY to 1.3mt in the current season through until the end of July (the season runs from October to September). Adverse weather and the spread of the swollen shoot virus have impacted the domestic cocoa crop. Virus and disease risks remain for 2023/24 as well, which could keep supplies tight for next year. Other major African producers, including Ghana and Nigeria have also been facing similar supply issues this year with both production and exports declining.

UNICA data shows that sugar cane crushing in Center-South Brazil was up 5.3% YoY to 41.8mt over the first half of September; although the pace of the crush did slow from the second half of August where we saw 46.5mt of cane crushed. Similarly, sugar production was up 8.5% YoY to 3.1mt over the first half of September. The sugar mix increased to 51.1% in 1H September, up from 50.7% in 2H August. Cumulative sugar production in Center-South Brazil has increased by 18.7% YoY to 29.3mt for the current season with 49.4% of sugar cane used for sugar production compared to 45.5% a year ago. Higher sugar prices amid supply uncertainty from India and Thailand has clearly sent the signal to Brazilian mills to favour sugar production over ethanol.

Source: ING

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Thomas

Economic

Thailand's central bankers have a tough choice to make when they meet on Wednesday: whether to continue tightening monetary settings to counter loose fiscal policy or take a breather as inflation runs below target.

Economists are almost evenly split over the decision, with 11 of the 21 surveyed by Bloomberg expecting the Bank of Thailand (BOT) to pause after having raised the one-day repurchase rate to a nine-year high of 2.25%. The rest see a quarter-point move.

"This will be a difficult decision," Thitima Chucherd, an economist at Bangkok-based Siam Commercial Bank Pcl said. She believes there's still room to raise borrowing costs one more time to reach the neutral rate — the level where policy is neither stimulating nor restrictive of economic growth.

At the same time, Thitima doesn't rule out the possibility of a hold should the BOT choose to wait for more clarity regarding the new government's fiscal policies, seen as a risk that may spur price pressures.

As part of a goal to boost annual economic growth to 5% from less than 3% in the past few years, Prime Minister Srettha Thavisin unveiled stimulus measures, including US$15.5 billion (RM72.92 billion) in cash handouts to ramp up consumer spending. While those steps will probably buoy domestic demand in the near term, they pose a challenge for the central bank's price stability objective.

While consumer price gains are currently below the BOT's 1%-3% target, data for August showed inflation quickened for a second straight month. That was followed by calls from from BOT Governor Sethaput Suthiwartnarueput for fiscal conservatism, saying what the economy needs more are investment.

Here's what to watch for in BOT's statement at 2pm local time:

Growth outlook

Amid the softer-than-expected gross domestic product print last quarter and China's faltering recovery, the central bank is expected to review its 2023 growth outlook of 3.6% on Wednesday. The state planning agency already lowered its full-year forecast to a range of 2.5%-3% this year.

Market participants will also look for cues on the central bank's rate-hike cycle. Governor Sethaput has since last month repeatedly signalled readiness to pause monetary tightening amid the economy's slowing recovery, saying that policy normalisation is "approaching the landing".

Baht weakness

The Thai baht has weakened more than 3.5% this month, making it the worst-performer among 12 Asian currencies tracked by Bloomberg. The nation's sovereign bonds have also underperformed, amid concerns on additional government borrowing to finance the stimulus measures.

Still, Srettha last week said the economy has the potential to hit 6% or 7% growth toward the latter part of his four-year term, although he acknowledged that those are "challenging numbers". He sees the weak baht helping make exports competitive and offer bargains to win over tourists.