Dollar firms, crude eases as Asia-Pacific trading opens

Summary:

• Crude prices slipped at the start of the week, with a rebound in Middle East exports and a G7 stock release offsetting Houthi claims of strikes on Aramco facilities.
• Aramco's November pricing for Asia was unexpectedly reduced to the steepest discount since 2020, while OPEC+ left output targets unchanged.
• The dollar strengthened versus major peers, pushing EUR/USD to its weakest since May 2025. USD/JPY hovered near 157 even as Tokyo's rhetoric grew firmer.
• BOJ Deputy Governor Uchida described AI as a major demand shock, and Japan's services PMI showed strong price pressures. The Nikkei hit a three-month high.
• Australia's services PMI declined as job cuts returned, Treasurer Chalmers labelled the Iran war an economic catastrophe, and New Zealand export prices rose.
• Deutsche Bank considers gold oversold. Wednesday's Fed minutes will scrutinize the 'one more hike' guidance.

Oil and geopolitical developments

Crude futures drifted lower on the week's opening. A pickup in Middle East supply and a 100 million barrel emergency release from G7 nations offset renewed attacks on Gulf energy infrastructure. Yemen's Houthis reported missile and drone strikes on Saudi Aramco installations in Riyadh and Khurais, though Riyadh has not confirmed them.

Aramco surprised the market by reducing its November Arab Light price for Asia by $3, to $5 below the Oman/Dubai benchmark, marking the deepest discount since June 2020 rather than the anticipated increase. European prices were raised in the same move. OPEC+ kept November output targets unchanged, and a capacity review linked to 2027 quotas now waits until mid-November.

On diplomacy, Iran's parliament speaker is reported to have said Tehran would reject new US peace offers and maintain the closure of the Strait of Hormuz until its conditions are met. That claim lacks independent verification. Washington also withdrew all B-1 bombers from Britain's RAF Fairford after a suspected Iran-linked threat to the base.

Foreign exchange

The dollar firmed against major currencies, and EUR/USD fell to its lowest since May 2025 as French bond market strain continued and rumours circulated that Spanish authorities are preparing for an early vote. MUFG proposed a short EUR/JPY trade, citing fragmentation risk in the euro area and expectations of additional BOJ tightening.

USD/JPY stayed near 158 despite a tougher message from Tokyo. Economy Minister Kiuchi said on Friday that Japan's deflation era was over. Finance Minister Katayama, also speaking on Friday, insisted the government was not reflationist and stood ready with the US to curb excessive currency volatility.

Japan

BOJ Deputy Governor Uchida characterised artificial intelligence as a large positive demand shock that has boosted prices and eased financial conditions, while flagging the risk of a pullback if profits fall short. Japan's services PMI eased to 51.3, but hiring quickened and output prices advanced sharply, with S&P Global indicating a possible BOJ rate hike as soon as October. The Nikkei rose around 2.5% to a three-month high at midday, propelled by AI-related equities, as regional stocks were firmer.

Australia and New Zealand

Australia's services PMI fell to 51.9 as firms cut staff and price pressures intensified, with S&P Global saying that could keep the Reserve Bank leaning hawkish. Treasurer Jim Chalmers described the Iran war as an economic disaster and cautioned that rising bond yields would add billions to debt servicing costs. ANZ's commodity price index for New Zealand increased 0.6% in September on stronger oil and gas prices, while a weaker kiwi lifted local-currency returns by 2.8%.

Mid-week outlook

The Federal Reserve's September meeting minutes are due Wednesday. They will demonstrate how strongly officials endorse the guidance for one more hike, after softer US jobs and inflation data reduced October hike expectations.