Daily FX market outlook

Daily FX market outlook

OPEC deal to cut output boosts commodity currencies, risk appetite.

During today’s Asian session the market was still dealing with the aftermath of yesterday’s surprise decision by OPEC to limit its oil production.  The market was at best expecting a deal to freeze output and there were serious reservations that OPEC would achieve even that as many meetings in the past ended in disarray and without any agreement.  Therefore the fact there was an agreement and the additional aspect that it involved a production cut (even if it was a modest 0.25-0.75 million barrels), was a substantial surprise.  It was the first production cut by OPEC since 2008.  Oil prices in the US jumped from sub-$45 a barrel to top $47.  Some analysts however still have doubts as to how the deal will be implemented since the adjustment of individual country quotas will only be decided in November during OPEC’s official meeting.  In addition, lower output from OPEC could be balanced with higher output from shale oil producers.  Therefore, it was not so clear whether the move would address the demand-supply imbalance but it was a step in the right direction.

Oil- and commodity- sensitive currencies did very well following the decision.  The Canadian dollar drove the US dollar back towards 1.3050 from 1.3250, although the US dollar recovered somewhat to 1.3095.  The Australian dollar briefly managed to pierce through key resistance at 0.77 to 0.7709 although it subsequently fell to 0.7670.

The yen on the other hand was a loser as dollar / yen rose to 101.70 from around 100.60 prior to OPEC’s announcement.  Oil’s rise encouraged stocks to gain as well, resulting in positive risk appetite which tends to hurt the yen.  In economic news, Japanese retail sales for August missed expectations by falling 2.1% month-on-month instead of -1.8% expected.

Euro / dollar was stuck near 1.12, as the market was a little less pessimistic on European banks the previous day.  Mario Draghi’s appearance yesterday did little to change sentiment as the ECB President mostly defended existing policies while hinting that there were limits as to how much more monetary stimulus could be applied (present negative interest rates cannot go down much more for example).

Looking ahead the market will face a relatively busy late European / early US session.  German unemployment numbers early in the session will be followed later by preliminary inflation numbers for September.  These will act as an indication to Eurozone flash inflation outtomorrow.  About 30 minutes later, final GDP numbers for the US will be released together with weekly jobless claims.  GDP growth for the second quarter is expected to be revised up slightly to 1.3% (annualized pace) from 1.1% recorded previously.  Pending home sales will also come out.  As was the case yesterday, it will again be busy in terms of central bank speeches with the Fed’s Lockhart, Powell, Kashkari and George speaking as well as the ECB’s Praet, Nowotny and Weidmann.  However, given the markets are not expecting any big change of policy either from the ECB or the Fed, these speakers might have limited impact on trading.