Citi

European Open

Mixed CNH PMI data took the headlines on a quiet Asian morning. Chinese Manufacturing PMI missed, coming in at 49.6 for September, (vs consensus 50.0 and 50.1 prior) while PMI for the non-manufacturing sector was positive at 53.2, (vs consensus 49.8). AUD gained during the Asian session, as iron ore prices increased prior to China’s week long holiday (October 1 – October 7).

Month end will guarantee the usual distortions, with Citi FX Quant's final estimate for FX hedge rebalancing strengthening, and calling for USD buying especially against JPY. Looking ahead today – central bank decisions will feature prominently with hikes widely expected in CZK (13:30 BST), MXN (19:00 BST), COP (19:00 BST), and UYU (time unknown). Therefore we'll be more interested in signals about the future rate path for many of these. Also look out for Riksbank meeting minutes in SEK (08:30 BST) and quarterly inflation report in BRL (12:00 BST). The data frontsees unemployment rate (10:00 BST) and Germany CPI for EUR (13:00 BST) where we see downside risks to the latter. Fedspeak is also on the table today, starting from 15:00 BST. However, we do not expect these to pose much headline risk.

Month End Flows

The final estimate of month-end FX hedge rebalancing needs points to USD buying, particularly against JPY. The signal has strengthened since the preliminary update and now exceeds the historical norm in most crosses.

Following seven months of uninterrupted gains, US equities have declined in September. The MSCI US equity index is down -3.79% month-to-date. US government bonds, as measured by the FTSE Russell GBI, have also weakened by -1.18%. This has left foreign investors with US assets over-hedged, leading to a net USD buying need. Equity hedge rebalancing needs explain 87% of the signal.

The signal to buy USD and sell JPY is the most significant at 1.85 standard deviations. This is because of strong gains in Japanese equities which mean that foreigners will likely need to sell JPY to hedge their asset gains, adding to domestic JPY selling needs to reduce foreign asset hedges. This month’s out-performance of Japanese equities over US is largest since April 2013.

Weak performance of Euro-Zone equities and bonds somewhat reduces the signal to sell EURUSD, making it the only signal to fall short of one standard deviation.

Credit Agricole

Asia overnight

Despite mixed China PMI data, it was a stable day for sentiment in Asia. WhileChina’s manufacturing PMI data slipped below 50 and into contraction territory onthe back of power cuts, the services PMI increased further above 50 and showeda rebound in activity post-Covid lockdowns, according to our China economist.There was good news from the US, with Democrat Senate Majority Leader ChuckSchumer announcing that a deal had been made to avert a US governmentshutdown at the end of this week, with government spending being extended to3 December. Admittedly, this amounts to just kicking the can down the road. Astatement by the PBoC said that it had told financial institutions to help localgovernments stabilise the housing market. Most Asian bourses and S&P 500futures were trading higher at the time of writing. A rebound in iron ore prices asChinese buyers build stocks ahead of a week-long holiday as well as a dip inUST yields helped the AUD outperform the rest of G10 FX in the Asian session.The USD and JPY were the weakest performers during the session