FED: Financial Stability Report Eyes Term Premia And "Opaque" Financing Risks

Given its usual relationship with the US dollar and Treasury yields, gold should have been subdued on Wednesday. The USD BBDXY rose 0.1% and the 2-year yield was slightly higher. Instead gold decisively breached $4000 reaching a high of $4059.31/oz and rose 1.4% on the day to $4042.03. The next level to watch is $4074.5, a Fibonacci projection. Political uncertainty in the US, France and Japan are driving safe-haven flows into precious metals.

• The US has been the major contributor to gold’s rally with the Fed resuming rate cuts and the September minutes signalling that most FOMC members expect more easing before year end.
• President Trump’s interference in the central bank with his attacks on Chair Powell and attempt to remove Governor Cook has also rattled markets. The ongoing government shutdown is the latest driver of bullion with no imminent end apparent and the subsequent delay in economic data clouding the economic picture.
• France’s President Macron is due to name a new PM by the end of the week but that is unlikely to solve the parliamentary impasse, especially on the budget.
• There has also received long-term support with increased central bank purchases of gold, especially from PBoC, which are expected to continue.
• Silver is up 2.2% to $48.887 after a high of $49.551, above round number support at $49.00, and is up 4.8% this month similar to gold’s +4.7%. Silver remains in an uptrend with the bull cycle extended this week and the next level to watch is the April 2011 record high at $49.804.

The AUD/USD had a range overnight of 0.6557-0.6587, Asia is trading around 0.6585. US equities cannot be kept down and surged to new highs again regaining momentum after it looked to have stalled. The USD did really react to this, consolidating its recent gains. The AUD drifted back toward the 0.6600 area but with no clear trend the range looks likely to continue. For choice the AUD still remains one of the better vehicles to express a long in, it's just what you choose to be long against. While AUD/USD remains below 0.6625/50 I suspect sellers will fade rallies first up, but a break above there would signal the upward trend could regain momentum and look to test the pivotal 0.6700 again.

• Options : Closest significant option expiries for NY cut, based on DTCC data: 0.6590(AUD365m). Upcoming Close Strikes : 0.6500(AUD1.01b Oct 14), 0.6600(AUD918m Oct 14) - BBG
• Data/Event: Consumer Inflation Expectation

Fig 1: AUD/USD spot 2H Chart

Source: MNI - Market News/Bloomberg Finance L.P

Source: Bloomberg Finance L.P./MNI