Citi

European Open

A risk-off mood was prevalent in the Asian morning as we saw Asian equities continue the sell-offs seen by S&P (-1.5%) and NDX (-2.2%) yesterday during the NY session. NKY and KOSPI were in the red, trading at -2.4% and -1.7% respectively. HSI opened significantly lower, but pared its losses to trade flat nearer to the European open. DXY unsurprisingly saw an uptick, trading near the 94.0 handle. AUD saw a rate decision, although there were no surprises as the RBA maintained its stance that conditions for rate hikes would not be met prior to 2024 and left its cash rate unchanged. NZD saw a dip ahead of its rate decision tomorrow, in which we expect a rate hike of 0.25%.

Looking ahead, we flag another set of central bank talk, starting with NOK’s Governor Olsen (09:00 BST), EUR’s Holzmann (11:00 BST). The former is expected to reiterate hawkish messaging from the Norges Bank meeting last month, while the latter is expected to deliver hawkish-leaning messages given his earlier commentary. RON will be expecting a rate decision (time unknown), although the consensus expectation is for no change at 1.25%. USD also sees data in the form of ISM Services Index (15:00 BST).

Lastly, we flag that CNY is on holiday today.

CBA

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USD strengthened modestly in the Asia session. In our view, the unresolved US debt ceiling can underpin USD in the near term. US President Joe Biden said that he could not guarantee the US wouldn’t exceed the debt ceiling in a few weeks. We still expect US lawmakers will reach a deal, but it is more likely than not to occur at the last minute. In the meantime, the yield on Treasury bills that expire on 21 October are the key indicator to watch for market expectations of default. Yields on that maturity are currently 10bp compared to 5bp on slightly earlier maturities.

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EUR/USD eased against a firmer USD and is trading near 1.1600. Meanwhile, GBP/USD traded in a tight range near 1.3595. We expect both EUR and GBP will remain under downside pressure this week on broad USD strength. Eurozone Central Bank President Christine Lagarde and Governing Council member Robert Holzmann speak today (4pm and 11am London time respectively).

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AUD/USD weakened slightly towards 0.7270. As expected, the RBA left the cash rate and yield target unchanged at its policy‑meeting. Also as expected, the RBA discussed rising house prices and noted that credit growth has picked up. Of note, the RBA said ‘it is important that lending standards are maintained and that loan serviceability buffers are appropriate’. This supports our view that raising the minimum interest rate buffer from 2.5% over the loan’s interest rate is the most appropriate form of macro‑prudential policy to be introduced. Read more here.

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Australia posted a record trade surplus of $A15.1bn in August. A sharp rise in cereal grain exports helped to offset the decline in the iron ore price. Rising prices for coal and LNG prices also offset some of the drag from iron ore amid supply constraints and strong demand. But we maintain that the energy outlook is not all upside risk for AUD. China’s energy shortages can slow its economy and is a headwind for AUD. We continue to see a risk AUD drops below 0.70 before the end of the year.