The Morning Update

The USD steadies, oil prices advance, equity markets are down, and US yields ease on Mideast conflict. Currency markets held steady, while equity markets fell as investors retreated with the threat of a weekend escalation in the Israel-Hamas conflict. The threat of increasing Middle East conflict continues to drive oil and gold prices higher, while treasuries slip from multi-year highs. UK 30-year Gilt yields hit 5.119%, their highest level since Sept 1998. The USD remains supported on dips on safe-haven buying, and after Federal Reserve Chairman Powell suggested that the US central bank is inclined to hold interest rates steady at its next meeting, but didn't rule out further hikes in 2023. Oil prices rallied +1% and gold approached 2,000 per ounce after the Pentagon reported stepped-up drone attacks in Iraq and Syria, and an American destroyer intercepted several cruise missiles fire toward Israel by Houthi rebels in Yemen. Today sees a light US economic docket with just the US Monthly Budget Statement and the Fed's Harker speech to help provide some intraday direction to currency markets.

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In other news. German wholesale prices have fallen at their fastest pace since 1949. Aid to Gaza was delayed by wrangling over the inspection regime. China puts export curbs on graphite. The UK government borrowing was lower than forecast in September. President Biden urges Congress to provide new funds for Israel and Ukraine. US warships shoot down missiles fired by Iranian-backed rebels. Canada withdraws dozens of diplomats from India in Sikh murder dispute. The US House is at an impasse as Republicans reject the plan for a caretaker speaker. Israel plans a buffer zone in Gaza after the Hamas war.

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In currency markets. The JPY hit the symbolic 150 level vs USD. CNY slips against the USD on the widening interest rate yield gap. The Pound weakens as trade remains wary over the Middle East, despite Tuesday's higher inflation print. CHF strengthens as a safe-haven currency, testing its highest levels since 2015. The Indonesian central bank intervenes with greater intensity amid an increasingly weaker rupiah. AUD & NZD weaken to 11-month lows on increasing geopolitical risk. CNY and Asian currencies ease 0.1% on average vs USD. Trading currencies are under pressure with ZAR weakened 0.5%, AUD, NOK & NZD down 0.25%, while JPY, SEK & MXN slipped 0.1% and CHF is flat.

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In commodity markets. Oil prices and Silver prices rallied by 1.5%, Natural Gas prices are flat, Gold prices strengthened by 0.8%, Copper prices weakened by 0.7%, Wheat prices gained by 0.5%, and Soybean prices fell 0.3%.

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CAD rebounds from near two-week lows at 1.3740, with the loonie finding support from rallying oil prices as the Middle East conflict intensifies. With the exception of strengthening oil prices, when you take into consideration the expected widening interest rate differentials versus the US and weakening global risk appetite we anticipate the CAD still has room to weaken through 1.3800. Investors will be focused on CAD Retail sales which is expected to fall to -0.3% vs +0.3% in August, which will continue to add to the narrative that the BoC will keep rates on hold for the rest of 2023.

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EURCAD eases in early trading with the effect of strengthening oil prices, but the month to date remains up 1% vs the Loonie.

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EUR remains capped at 1.0600 as markets continue to trade in a "risk-off" sentiment. Increasing geopolitical tensions continue to support the safe-haven USD and further escalations in Middle-East tensions are likely to add further pressure on the Euro. Domestically German producer prices posted their biggest decline on record in September decreasing 14.7% y/y, falling at its fastest rate since 1949. The steep decline in producer prices highlights that inflation levels are falling in Europe's largest economy. The ECB is meeting next week and markets are highly anticipating that the ECB will keep interest rates unchanged for the time since June 2022. Intraday we expect some consolidation in currency markets with the absence of key US economic data.

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GBPEUR slips to its weakest levels in 6 months as the pound extends losses after UK Retail Sales disappointed markets.

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GBP continues under pressure and battles to hold above 1.2100. The pound remains under pressure with the escalating Middle-East conflict favoring the safe-haven CHF & USD, coupled with disappointing UK Retail Sales data. Domestically, Labour deals big election blows to the Conservatives as they overturn two large majorities. The UK consumer confidence level plunges amid higher mortgage and rental costs, and UK Retail Sales for September dropped more than expected to -0.9% vs +0.4% in August. Markets will focus on developments across the Middle East, with the absence of any major US economic data releases. We remain bearish on the pound with expectations we may see a test of 1.1800, possibly 1.1500 vs USD in Q4/23.