Asian equity markets traded with a cautious tone as the FOMC draws closer and after the region failed to maintain the early impetus from US

FX trade was relatively tentative overnight. GBP/USD nursed yesterday’s Carney-inspired losses while CAD was hampered by comments from BoC’s Lane

Looking ahead, highlights include German ZEW, NZ Dairy Auction and US APIs

ASIA

Asia equity markets traded with a cautious tone as the FOMC draws closer and after the region failed to maintain the early impetus from US where financials led the S&P 500 and DJIA to fresh record closes. ASX 200 (+0.1%) and Nikkei 225 (+1.7%) were positive in which the latter surged as it played catch up to the gains on return from holiday, while weakness in defensive stocks restricted upside in Australia. Shanghai Comp. (-0.3%) and Hang Seng (-0.1%) were dampened despite another firm PBoC liquidity operation, with the underperformance in China the rest of the region attributed to profit taking. 10yr JGBs lacked demand amid the positive risk tone in Japan and although the BoJ were present in the bond market, this was for a relatively reserved JPY 535bln total.

PBoC injected CNY 130bln via 7-day reverse repos and CNY 20bln via 28-day reverse repos. (Newswires)

PBoC set CNY mid-point at 6.5530 (Prev. 6.5419)

EUROP/UK

UK PM May is to convene a special Brexit cabinet meeting, according to UK press reports. (Newswires)

The German trade chief has dismissed Brexit as a ‘pipe-dream that will never happen’. (Telegraph)

FX

Price action was relatively light overnight amid a lack of key data releases and as focus remained on the upcoming FOMC. Nonetheless, this provided relief for GBP/USD which partially nursed losses triggered by comments from BoE Governor Carney that any prospective increases in the Bank Rate would be expected to be at a gradual pace and limited. CAD was also hampered by central bank speak after BOC Lane said the central bank is 'paying close attention' to the impact of stronger CAD. AUD was largely unreactive to an unsurprising minutes release where the RBA stuck to its usual rhetoric, while HKD strengthened after the HKMA announced HKD 40bln in additional exchange fund bills due to increased demand from banks alongside an abundance of liquidity in the banking system. Finally, USD/JPY caught a bid heading into European trade after breaking above the prior session’s highs.

RBA Minutes from September 5th Meeting stated the central bank judged steady policy was consistent with growth and inflation forecasts, while it also noted that further strength in AUD would result to a weaker pick up of growth and inflation. (Newswires)

BOC's Lane said data shows Canadian growth is becoming more broad and self-sustaining, but added that the BOC is 'paying close attention' to impact of stronger CAD. Lane also commented that rates are still lower to estimated neutral level which is appropriate and that each meeting is live, while he stressed the importance of data-dependence. (Newswires)

COMMODITIES

Price action across commodities during Asia trade remained out of focus with WTI crude futures flat after a failed attempt to gain a footing above USD 50/bbl, although prices have stayed at a near distance for another retest of that resistance level. Elsewhere, gold prices (-0.1%) languished near its lowest levels in more than 3 weeks ahead of the Fed meeting, while copper was flat amid an indecisive risk tone.

US

The Treasury yield curve saw modest bear steepening on Monday, though the small rise in yields wasn’t anything to get particularly excited about. Traders are not expecting the FOMC to raise the Federal Funds Rate target after its meeting this week; money markets are pricing a 100% implied probability rates will be maintained. Attention will be paid to the Fed’s estimates of how many hikes it expects over its forecast horizon (which extends to 2020), though analysts aren’t expecting any major upward revision to the hike trajectory. Ex-bills, the only notable supply out of the US this week is $11bln of 10-year TIPS (Thursday). US 10-Year Futures (Dec) settled 7+ ticks lower at 126-02+.

US Senate passed the USD 700bln defence policy bill, while there were also reports that Senate Republicans are said to consider a USD 1.5tln tax reduction for the budget. (Newswires/WSJ)