The Morning Update

The USD weakens, oil prices slip, equity markets are down, and US yields are mixed in cautious markets. The USD slips off 10-month highs but remains up over 2.5% in September as China concerns and hawkish Fed comments provide support for the greenback. Oil prices drop below $96pb while maintaining underlying support with a higher crude draw and tight global supply. Equity markets face the risk of a further selloff linked to reported large options positions. In China, Evergrande shares were suspended after a report that its chairman had been placed under police watch, increasing concerns of growing liquidation risk. In the US, with just 3-days away from a partial shutdown of the government, with no agreement is in sight. Credit agencies have repeatedly warned that brinkmanship and political polarization are harming the US financial outlook. Today sees a busy economic docket with several key economic releases: German Inflation report, US GDP, Fed Chair Powell, as well as Fed Cook, Barkin & Goolsbee speaking, Initial Jobless Claims, Pending Home Sales, & Core Personal Consumption Expenditures will help provide intraday direction to currency markets.

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In other news. Argentina risks hyperinflation after election giveaways and dollar pledge-FT. Taiwan unveils first locally built submarine in pushback against China. A Reuters poll showed that China factory activity likely steadied in September, suggesting the world's second-largest economy has begun to stabilize. The UK to ease finance sector rules to boost investments post-Brexit. Stock futures slip as Wall Street nears the end of losing month and quarter-CNBC. Meta CEO Zuckerberg looks to digital assistants, smart glasses, and AI to help metaverse push. GameStop names Ryan Cohen as CEO effective immediately.

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In currency news. CNY edges higher ahead of a week-long national holiday. JPY looks on track to test 150 vs. USD, keeping the yen near a key intervention zone. Euro bounces off lows ahead of key German inflation report. GBP strengthens as markets consolidate ahead of US Fed Chair comments. Russian rouble hits over 1-week lows vs. USD as tax period ends. CNY firms 0.1%, while Asian currencies are flat on average vs. USD. Trading currencies rebounded with MXN & ZAR are flat, JPY & NOK are up 0.2%, CHF, AUD, and SEK & NZD up 0.45% vs. USD.

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In commodity markets. Oil prices fall 0.5%, Natural Gas prices drop 1%, Gold inches higher 0.1%, Silver firms 0.3%, Copper prices rally 1.1%, Wheat prices gain 0.1% and Soybean prices weaken 0.6%.

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CAD holds steady near 1.3500 ahead of the Fed Chair's and key US & German data releases. The loonie has rallied from its two-week lows as oil prices continue to gain strength and CAD 10-year yields are holding near 16-year highs. The focus will be on Friday's CAD GDP report which is expected to edge higher in July to 0.1% vs. -0.2% in June, a print outside of the range would impact CAD volatility. The intraday direction will come from the flurry of key economic releases in the morning and the Fed Chair's comments in the afternoon.

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EURCAD bounced off 10-month lows as investors consolidated ahead of the German inflation report and ahead of the Fed Chair speech today.

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EUR bounces through 1.0500 and retests 1.0550 ahead of the German inflation report. The Euro rallied from 8-month lows of 1.0488 tested in early trading today on a broad USD correction heading into a flurry of key economic releases, including the important German inflation report which is expected to fall to 4.6% y/y vs. 6.1% previously. The prospect of a softening CPI print in Germany could make it difficult for the Euro to extend gains against its peers, keeping the door open for further weakness towards 1.0350.

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GBPEUR continues to edge higher towards 1.1600, as markets anticipate a softer inflation print in Germany which could increase a dovish stance by the ECB.

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GBP recovers amid a weaker USD towards 1.2200 heading into key US data releases and Fed Chair Powell's speech. The pound strengthened, not on its own merits, but on the back of a correcting USD. The pound remains vulnerable to further weakness in the face of souring risk sentiment and the increasing prospect that the BoE has completed its hiking policy for 2023. The intraday direction will be driven by US Durable Goods Orders data and comments from the Fed Chair later in the afternoon.