2022 October

Dear Customer,

This office will be closed on 01/11/2022 (Tuesday) for Melbourne Cup , and we will reopen on 02/11/2022 (Wednesday). If you have any inquires, please contact Sydney office on 02 9267 8878 .
Sorry for any inconvenience caused. Wish you have a nice holiday.

SUPAY
01/11/2022

US stock indexes finished the week with healthy gains despite ongoing bond market volatility that sent US rates to fresh multi-year highs. The benchmark 10-year Treasury yield rose as high as 4.335%, its highest level since November 2007. Equity traders weren’t all that phased by the moves, as higher rates effectively tighten financial conditions. That said, the need for further Federal Reserve action lessens—a tailwind for equity valuations. The S&P 500 Index, Nasdaq-100 and the Dow Jones Industrial Index finished the week with gains of 2.37%, 2.39% and 2.47%, respectively.

The US Dollar DXY Index took a breather last week, falling around 0.75% as the policy-sensitive 2-year yield lost steam. The Federal Reserve entered a blackout period on Saturday, which forbids FOMC members from commenting on monetary policy before the November 02 policy meeting. Rate traders see a terminal rate of around 5% early next year, leaving plenty of rate hikes on the table between now and then. The US is set to see updated purchasing managers’ indexes from S&P Global. US factory activity has remained stubbornly strong, with a Fed report stating that factory production utilization hit the highest level since 2000. The consensus estimate sees manufacturing PMI for October remaining in expansion territory at 51.0, according to a Bloomberg survey.

Chinese President Xi Jinping is expected to take the stage on Sunday, marking the start of a third term in office. That would be a precedent-breaking move that further consolidates his power and influence as “leader,” a revered term previously reserved for Mao Zedong, which has started circulating among his followers. The Chinese Yuan weakened around 0.5% against the Dollar, hitting a record low. Traders are keen to see GDP numbers due this week after the high-impact print was delayed last week. The Bloomberg consensus sees China’s third-quarter growth rate at 3.5% from the previous three-month period.
The Japanese Yen was nearly unchanged from last Friday after USD/JPY trimmed mid-week strength. A broadly weaker USD helped alleviate JPY pressure, but policymakers likely intervened after the exchange rate rose above the 150 level. A still-ultra-dovish Bank of Japan is casting doubts on the ability of Japan’s Ministry of Finance to hold the line against JPY shorts, although capitulation now would signal an embarrassing failure and likely see the Yen plummet. A Kobayashi Maru indeed.

Elsewhere, US natural gas prices plummeted over 23% as warmer weather across much of the Continental United States combined with a larger-than-expected US inventory build dashed supply shortage fears going into the winter months. Brent oil prices rose a modest 1.9%, while WTI crude slipped 0.6%. The US and global benchmarks remain on track to break a 4-month losing streak, although prices are still well off yearly highs.

It is an eventful week ahead in terms of rate decisions. On Wednesday, the Bank of Canada is expected to hike its benchmark lending rate by 75 basis points, according to overnight index swaps (OIS). Canadian inflation remains above estimates, with the latest core CPI reading at 5.4% in September solidified chances for a larger hike. The Canadian Dollar rose nearly 2% against the Greenback on the week. The European Central Bank (ECB) will announce its interest rate decision on Thursday. OIS pricing is showing an 89% chance for a 75-bps rate hike. EUR/USD rose around 1.5% last week.
（From Thomas Westwater）

CENTRAL BANK WATCH OVERVIEW:
The Bank of Canada is expected to raise rates by 50-bps when policymakers meet later this month.
While the Reserve Bank of Australia and Reserve Bank of New Zealand won’t meet again until November, both central banks are forecast to raise rates by 50-bps next month.
Retail trader positioning suggests that AUD/USD rates have a bearish bias, NZD/USD rates have a mixed bias, and USD/CAD rates have a bullish bias.
RATE HIKE PATH SLOWING
In this edition of Central Bank Watch, we’re examining the rates markets around the Bank of Canada, Reserve Bank of Australia, and Reserve Bank of New Zealand. After raising rates aggressively over the course of 2022 – frontloading rate hikes, if you will – the three commodity currency central banks appear poised to slowdown their pace of monetary policy tightening moving forward. Relative to the Federal Reserve’s still-aggressive intentions, this change in perception has been a negative development for the Australian, Canadian, and New Zealand Dollars.
RBA DISAPPOINTMENT WEIGHING ON AUSSIE
Recent comments by key Reserve Bank of Australia officials suggests that the central bank still has some ways to go in order to bring its main rate into neutral territory, the level as which monetary policy is neither expansionary nor contractionary. RBA Assistant Governor for Economics Luci Ellis remarks this week effectively pegged the neutral rate between 2.5% and 3.5%; currently, the RBA’s main rate is 2.6%. More tightening may be ahead, but it may come in more measured increments over the next few months.
According to Australia overnight index swaps (OIS), there is an 82% chance of a 25-bps rate hike in November and a 59% chance of a 25-bps rate hike in December. Rates markets are priced such that the RBA will bring its main rate to 2.997% by the end of 2022, which is a meaningful reduction from where markets were priced in early-September, when the main rate was expected to rise to 3.259% by the end of the year.
AUD/USD: Retail trader data shows 80.49% of traders are net-long with the ratio of traders long to short at 4.13 to 1. The number of traders net-long is 7.84% lower than yesterday and 1.35% higher from last week, while the number of traders net-short is 27.51% lower than yesterday and 6.14% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests AUD/USD prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger AUD/USD-bearish contrarian trading bias.
— Written by Christopher Vecchio, CFA, Senior Strategist