Written by Steven Dooley, FX & Macro Strategist – APAC
Global overview
The US dollar extended gains overnight with worries about a potential US government shutdown adding to concerns around higher US interest rates. The AUD/USD fell to the lowest level for the year so far. The euro was also lower ahead of key inflation numbers due over the next 48 hours.
US shutdown worries add to market fears
Financial markets remain unsettled with another night of volatility in US shares while US bond yields increased with the benchmark 10-year bond yield climbing from 4.56% to 4.61% overnight.
US shares were initially sharply lower – reaching three-month lows – before a late rally saw key markets end broadly flat.
In addition to higher bond yields, looming worries about a potential government shutdown have also hit sentiment, with Republican leaders rejecting an emergency funding bill overnight.
The growing nervousness across markets saw safe havens favored, with the US dollar index climbing to new ten-month highs overnight.
Aussie falls to 2023 lows
The Australian dollar was one of the hardest hit currencies overnight.
The AUD/USD fell 0.7% to fall to the lowest level for the year so far.
The NZD/USD fell 0.4%.
The USD was also higher in Asia with the USD/SGD up 0.3% with the USD/CNY broadly flat.
Euro tumbles ahead of inflation numbers
Eurozone inflation looks likely to continue to decline, from 5.2% in August to 4.8% in September. Core inflation is seen as falling less, but it will likely drop from the 5% level that has been stuck at for over a year.
Base effects in Germany likely cause headline inflation to drop significantly to 4.3% in September after several months of +6% inflation. In France, we anticipate that rising fuel prices and base effects from package holidays will cause headline HICP inflation to increase from 5.7% in August to 6.2% in September.
Finally, as some of the deflationary effects of energy prices disappear, we should see Spanish HICP inflation rise from 2.4% in August to 3.6% in September. We expect that retail energy costs will actually increase in the upcoming months as core inflation in Spain continues to be high.
That said, it looks increasingly likely that the ECB’s rate hiking cycle is over, with a terminal deposit rate of 4.00%. Financial markets see no more hikes with the first cut priced in for July 2024 (source: Refintiv).
The euro saw further sharp losses overnight with the EUR/USD down 0.6%.
Aussie hits new lows
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 25 – 29 September
All times AEST
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