US TSYS: A Little Firmer

• RES 4: 145.37 High Sep 8
• RES 3: 144.56 High Sep 12
• RES 2: 143.68 38.2% retracement of the Aug 2 - Sep 28 bear leg
• RES 1: 142.87 High Oct 4
• PRICE: 141.42 @ 05:09 BST Oct 5
• SUP 1: 138.05 Low Oct 3
• SUP 2: 135.52 Sep 28 low and key support
• SUP 3: 135.27 Low Mar 2012 (cont)
• SUP 4: 134.76 4.382 proj of the Aug 2 - 12 - 15 price swing

Bund futures remain in a downtrend, however, the contract has entered a short-term bullish corrective cycle. This week’s gains reinforce this bullish theme and price has cleared resistance around the 20-day EMA. The average intersects at 141.62 and the clear break signals scope for a stronger bounce. This opens 143.68, a Fibonacci retracement. Key support and the bear trigger has been defined at 135.52, the Sep 28 low.

Most Asia-Pac equity indices are in the green at writing, tracking a positive lead from Wall St. on lingering speculation of a slowdown in Fed tightening amidst softer economic data.

• The Hang Seng (+5.3%) outperformed, playing catch up to regional equities on its first day back from a holiday. The HSTECH (+7.4%) contributed the most to gains, adding to strength in China-based stocks (Hang Seng China Enterprises Index: +5.7%).
• The ASX200 deals 1.7% firmer, building on Tuesday’s ~3.8% higher close, rising to fresh two-week highs amidst the repricing of expectations around the RBA’s terminal rate. Rate-sensitive tech leads the bid, with the ASX All Tech Index sitting 3.7% better off at typing.
• The Nikkei 225 is 0.4% better off at writing, on track to close higher for a third straight session, extending a move off of 15-week lows observed on Monday. Large caps such as Softbank (+2.0%) and Fast Retailing (+1.1%) lead the way higher, offsetting weakness in consumer staples.
• E-minis sit 0.4-0.5% weaker at writing, paring a little of their recent gains after a two-day rally (+5.5-5.9% apiece) saw the contracts record fresh two-week highs on Tuesday.

A$ correlations, on a short term basis, with yield differentials have rebounded. The table below presents the correlations for the past week and month (in levels terms) for AUD/USD against traditional macro drivers.

• Our last update had short term correlations with yield differentials in negative territory. As is usually the case though, the correlations have picked back up during RBA week.
• Yesterday's dovish RBA hike has also likely increased focus on the yield differential outlook from an AUD standpoint. The AU-US 2yr spread is threatening to break sub -100bps. We have spent little time below this level from an historical standpoint, see the second chart below.
• AUD/USD correlations with commodities and equities are generally lower compared to late September. We remain in positive territory for the most part though.
• The most notable pullback is for iron ore, although China onshore markets are closed this week.

Table 1: AUD/USD Correlations (Levels)

Source: MNI - Market News/Bloomberg

Fig 1: AU-US 2yr Government Bond Yield Spread

Source: MNI - Market News/Bloomberg