A further slowing in growth
The RBA’s failure to buy the bond in the days following the Q3 CPI report convinced the market the YCC target at least in current form, was set to be formally abandoned out of the 2 November Board meeting.
Having ended September at 0.7230, AUD/USD posted a low for October of 0.7194 on October 1, then tracked higher during the month, reaching a high of 0.7545 on October 21 before finishing the month at 0.7518, for an overall gain of 4.0%
AUD/USD gains in the early part of October came in the context of energy shortages in Europe and Asia, attributed to both demand and supply factors, supporting commodity prices and commodity-linked currencies. Reports from China of the need to secure supplies for winter ‘at all costs’, gas supply constraints in Europe and substitution away from gas to other fossil fuels, pushed thermal coal to a record $274.5/ton and Brent crude to above $85 for the first time since 2014. Adding upward pressure, OPEC+ declined to increase supply beyond the prevailing agreement for +400k barrels/day. Iron ore prices also rose despite concerns around China’s property sector.
Improvements in risk sentiment through much of October, evidenced by a fall-back in the VIX index from 25 at the start of October to a low of 15, somewhat undermined the USD – adding to support for the AUD – in the face of US data prints that generally came in on the strong side of expectations, including ISM/PMIs, retail sales and CPI. While US Payrolls data – a much awaited test for Fed QE tapering – came in below expectations, this failed to dissuade Fed speakers from supporting a tapering announcement out of the (Nov 2-3) FOMC meeting, alongside which many officials expressed concerns about upside risks to the central view that current inflation pressures were likely to prove transitory. Fed chair Powell said on October 22 that it was indeed ‘time to taper but not time to raise rates’.
In the wake of a stronger than expected Q3 CPI report on 27 October, the yield on the April 2024 ACGB – the object of the RBA’s 0.1% YCC target, came under strong upward pressure. The RBA’s failure to buy the bond in the days following the CPI report convinced the market the YCC target at least in current form, was set to be formally abandoned out of the 2 November Board meeting. Of note though, sharply higher Australian yields – more so that elsewhere in the world – provided only limited support to the AUD late in the month.
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