FX market outlook

FX market outlook

Dollar extends gains; euro at one-month lows.

The dollar rose for a third day against the yen despite Friday’s lower-than-forecast US non-farm payrolls (NFP) report, as risk appetite was back in the markets. The dollar index is trading near a four-week high.

There was a relatively light economic calendar for the Asian session, with just Japanese current account data that were released. The upbeat numbers had little impact on the yen. In Australia, home loans data were worse-than-expected and this had a negative impact on the aussie. A fall in iron ore prices also weighed on the Australian currency against the greenback, and it slipped to as low as $0.7477.

The dollar rose to an Asian session high of 111.57 yen, helped by risk-on sentiment resulting in diminished demand for safe haven assets. A lack of any major disagreements between US President Donald Trump and Chinese President Xi Jinping at their meeting that was held last Thursday and Friday also helped the dollar.

The next risk event for the greenback will be this week’s US data on retail sales and inflation. Ahead of these releases that are due on Friday, a speech by Fed Chair Janet Yellen will be eyed later today. Meanwhile, remarks from FOMC voting member William Dudley last Friday also helped support the US currency. Dudley said that the Fed’s plan to shrink its balance sheet may result in only “little pause” in its hiking plans. FOMC member James Bullard’s dovish remarks today were shrugged off as he is a non-voting member.

The euro recorded losses against the dollar for a fourth consecutive trading day, reaching a one-month low of $1.0569 in today’s Asian session.  Last week ECB President Mario Draghi said that the policies of the ECB remain appropriate, suggesting that interest rates will remain lower for longer. This widens the policy divergence between the Federal Reserve and ECB, as the US central bank has already begun its hiking cycle. The interest rate differential will likely weigh on the euro.

In commodities, oil prices held on to last week’s gains, while gold consolidated Friday’s losses. WTI oil traded around $52.40 a barrel, while Brent crude hovered around $55.35 a barrel. Both benchmarks ended on Friday at one-month highs. Gold pivoted around the $1254 an ounce level.

Looking ahead to the rest of the day, the main highlight will be Fed Chair Janet Yellen’s speech. In terms of economic data, the Eurozone Sentix investor confidence survey and Canadian housing starts are due.