JAPAN: Nikkei - Bounces Strongly Off 49000, Focus Turns Toward 50600-50800

Going into today’s RBA policy decision, RBA-dated OIS pricing implies almost no chance of an easing, with just a 3% probability assigned. 

• In the wake of the surprise rise in the September unemployment rate to 4.5% in mid-October, markets had briefly priced as much as an 80% probability of a 25bp rate cut in November.
• However, that confidence quickly faded after the Q3 CPI printed well above expectations.
• As it currently stands, the OIS market has only a 75% chance of a 25bp cut by mid-2026.
• However, that may still be too optimistic as rising annual inflation tends to end easing cycles. (see chart)

Source: Bloomberg Finance LP / MNI

Natural gas prices started the week higher driven by supply concerns and the coming winter. Europe rose 2.4% to EUR 31.87, close to the intraday peak, as temperatures are forecast to shift lower towards month end. Wind-power fluctuations also are important to the gas outlook. US prices were also up.

• European storage has stabilised at just under 83%, which is around 12pp below early November last year and makes the region vulnerable to cold snaps and disruptions to incoming supplies. For instance, flows from Algeria to Italy are at their lowest in a month, according to Bloomberg. LNG imports from the US are important and there are concerns that the outage at Texas’ Freeport plant could impact shipments to Europe.
• Ukraine’s attacks on Russia’s energy infrastructure also remain a risk with an oil tanker struck in the Black Sea and port infrastructure at Tuapse damaged.
• US gas was up 2.8% to $4.241 after reaching $4.298, this followed Friday’s 4% increase on expectations of increased demand. However, it looked through forecasts for mild weather in the first half of November and estimated heating days being below the seasonal average.
• Flows to the Freeport LNG plant were disrupted on the weekend but gradually resumed yesterday. BNEF estimates flows to US LNG export terminals rose 12.5% w/w on Monday, which is likely supporting US prices. Reuters reported that US LNG exports exceeded 10 mmt in October as new projects came online.

US equities continue to chop around sideways but seem to bounce pretty hard on any dip for the moment. This morning has seen stocks open slightly lower, E-minis(S&P) -0.05%, NQZ5 -0.10%. The AUD is looking to consolidate some of its recent gains in the crosses as it looks to build on its recent outperformance. Should the RBA come out as hawkish which is a risk in today's meeting I feel the crosses are probably the best way to express the AUD outperformance and could help them re-engage their momentum which has stalled in recent days.

• EUR/AUD - Overnight range 1.7565 - 1.7658, Asia is currently trading around 1.7625. The pair continues to be well supported on a 1.75 handle, a hawkish RBA today could be the catalyst needed to break down. I suspect rallies toward 1.7700/1.7800 would now be faded but a break under the 1.7500 area is needed to signal a potential deeper pullback toward the 1.7000 area.
• GBP/AUD - Overnight range 2.0020 - 2.0142, Asia is trading around 2.0095. The pair has found some support around 2.0000 after breaking through its support around 2.0300. I suspect rallies will now be met with supply as the market will look to test the support in the 198-200 area where I think we should find some demand initially. A break below this support would then signal the beginning of a bearish downtrend.
• AUD/JPY - Overnight 100.40 - 101.13, Asia is trading around 100.80. The pair is consolidating around 101.00 at the moment as it looks to build on its recent move back above 100.00. Suspect dips will continue to be supported for now with the first target 102.50 and then beyond. A hawkish RBA could give it the push it needs to get the momentum higher once more.

Fig 1: GBP/AUD spot Weekly Chart

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