FX Update: GBP up as Brexit talks to extend. RBA takes AUD down.

Trading focus:

JPY still in the cross-hairs
As I have noted recently, the yen is receiving a double whammy of support from the strength in safe haven bond yields (the most important driver) and weak risk sentiment of the last couple of sessions. I speculated in this morning’s Saxo Market Call podcast whether one of the factors keeping the EURJPY from lower levels is the EU sovereign bond market, where bond traders have had a field day since the spring in bidding up peripheral debt (piggy-backing ECB flows) as EU sovereign spreads tighten. This element is entirely missing in Japan’s moribund JGB market, but the JPY remains undervalued in real-interest rate terms. We focus on the 105.00 area in USDJPY for a wider realization of this level – every prior attempt below this level since 2018 has been gathered up within a few trading days.

Pause button pressed for sterling
Just ahead of yesterday’s update, the headline crossed my screen that Boris Johnson would not walk away from talks today, which the market took as a hopeful sign that the current status of the talks is sufficiently amicable to indicate that a deal is reachable. According to sources in the major news media, both sides suggest that late October or the first week of November are the more likely timeframe for an agreement. On balance, the fact that talks are ongoing are promising for sterling, but we still likely will need that critical breakthrough for sterling to post any larger directional move. Until then, a break below 0.9000 in EURGBP would represent a fuller reversal of the prior rally and could lead to the exploration of the bottom of the range just below 0.8900, which also happens to coincide with the 200-day moving average.

AUD hit on RBA consideration of longer term bond purchases
The Australian 10-year yield dropped a chunky 7 basis points overnight (from 0.84% to 0.77%) on RBA governor Lowe out indicating that the RBA is considering extending the maturities of its bond purchases and mulling whether lowering 5-10 year yields would help the Australia labour market. The Governor complained that Australian 10-year yields are still too high. This has the market placing bets that the RBA is set for a bigger move at  the November 3^rd meeting, which could include a rate cut and now more likely to see a proper QE programme that includes purchases to lower Australian yields all along the curve.

Chart: AUDUSD
The AUD is lower across the board on the RBA’s consideration of extending bond purchased out the yield curve and the local line of consolidation has fallen overnight in AUDUSD as the pair really only has the huge 0.7000 area to consider from here to the downside tactically. To get the pair significantly below that level, we would likely need to see further weakness in China’s currency, commodity prices like iron ore heading lower, and generally weak risk sentiment. The first area lower beyond 0.700 is the 200-day moving average just below 0.6800.