GOLD: Tests $4,000 Whilst Nears Oversold

Aussie bond futures are higher, led by the 3yr. YM was last +7bps to 95.06, just off session highs (95.07), while 10yr futures (XM) were +6bps to 94.74. For the 10yr this is challenging 20-day EMA resistance (around 94.74), with a break higher bringing 94.80 (early Sep highs) into focus. For the 3yr, upside 20-day EMA resistance rests at (95.12). Recent lows were at 94.875 from Sep 14. UST futures have risen, TYZ6 last 106-07, +07 for the day. Oil futures continue to correct lower, now tracking down for the sixth straight session, which is aiding these futures moves. Increased supply hopes (returning supply from Saudi Arabia), along with US/Iran talks, continue to weigh on oil (WTI is now 12.5% off mid Sep highs). 

• ACGB yields are 5-6.5bps lower across the benchmarks, with the front end leading the move. The 3yr was last 4.93%, the 10yr close to 5.24%. The 3yr is capped above 5.0% for now. RBA market pricing for next week's meeting remains close to 90%, while longer dated OIS levels have softened modestly today.
• On the data front, Sep preliminary PMIs fell versus August reads, particularly for manufacturing. However, looking at the quarter as a whole, Q3 services PMI was also higher than Q1 and Q4 signalling resilience. Cost growth rose to its highest for Q3 driven by services but importantly selling price inflation also increased implying increased cost pass through but both measures are below Q2’s highs. The RBA will continue to watch second-round effects from higher fuel costs as it worries upside inflation risks are “materialising”.
• Looking ahead, August jobs print on Thursday and are expected to unwind July’s loss of 15.8k rising 20k with the unemployment and participation rates holding steady at 4.5% and 66.9% respectively. The data are volatile and so 3-month averages are needed to gauge the trend. They have signalled a gradual easing in labour market conditions, which the RBA has welcomed in its fight to return inflation to target.

• Gold continued to trade in tight ranges today in Asia, giving back much of the overnight gains.  
• Currently down -0.33% at US$4,346 - gold remains wedged between the converged 20-day / 100-day EMA and the 50-day EMA.  
• When moving averages converge it shows that price range contraction is occurring. Volatility is dropping, and the asset is compressing into a tight equilibrium. In markets, periods of low volatility are almost always followed by an explosive breakout. Short-term prices are dropping faster than the long-term averages-proving that the bullish momentum has likely dried up.
• This leaves gold even more sensitive to changes in interest rate expectations. The FED's next decision is October 29 and currently, the market has a 50% probability of a rate hike priced in. Watch as this pricing evolves for guidance on gold's direction. Should markets become more hawkish, gold could trade back down towards $4,200.
• For now, it looks likely more tight ranges for bullion into the end of this week.

Fig 1:  Gold Stuck in Tight Technicals

source: Bloomberg FInance LP / MNI

The BBDXY has had a range today of 1205.20 - 1207.19 in the Asia-Pac session; it is currently trading around 1206, +0.12%. The US Dollar is having another crack at challenging the pivotal 1205-1207 area. It failed at the second time of asking overnight but this price action continues to catch the eye as risk trades firmly on the front foot. The US Dollar continues to lag and diverge from the rebound seen in the broader market. A sustained break back above the 1205-1207 area would have me thinking we could potentially see the USD turn higher again. Something I would have previously thought would have been a tough ask while US equities and broader risk continues to build on their rebound. While the market works through how it wants to proceed, I suspect we could continue to see a range of 1197-1207 play out. 

• EUR/USD -  Asian range 1.1426-1.1450, Asia is currently trading 1.1430, -0.17%. The pair continues to struggle anywhere back toward the 1.1500 area, pretty telling price action. I have been skewed in favour of fading this rally in the EUR, with this weekly 1.1600 area pivotal for me. Can the US Dollar continue to ignore the surge in risk ? It needs to break higher for this move lower in the EUR to gain momentum from here. If you are a EUR bear there is now a clear point back above 1.1650-1.1700 where you are wrong. The price action is now turning decidedly bearish and I suspect rallies are now likely to be faded short-term. On the day the first resistance is back toward 1.1470-1.1510 which continues to hold, through here the 1.1550-1.1600 area comes back into play.    
• GBP/USD - Asian range 1.3316-1.3348, Asia is currently dealing around 1.3318, -0.20%. The pair continues to trade heavy after breaking back below the 1.3450 area. I suspect rallies could now be faded as momentum turns back toward the lower end of the 1.3150-1.3650 range. Look for 1.3450-1.3500 to now turn into resistance at the first time of asking.
• Data: France Sept. HCOB PMIs, Germany Sept. HCOB PMIs, Eurozone Sept. PMIs, UK S&P Global/CIPS Aug. PMIs, US MBA Mortgage Applications, US S&P Global Sept. PMIs, The OECD publishes interim economic outlook

Fig 1: USD(BBDXY) Spot Daily Chart

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