FX market outlook

FX market outlook

Aussie weakens after China downgrade; oil rises ahead of OPEC.

The aussie reacted negatively to Moody’s downgrade of China’s rating to AA- with a negative outlook from a previous A1, amid concerns over rising debt and slowing economic growth.

China is a major trading partner for Australia and so the news had the most impact on the currency which fell over 0.5% against the greenback to reach $0.7441 during the Asian session, reversing a three-day advance. Disappointing Australian construction data also weighed on the aussie.

The US dollar bounced back and pulled away from recent lows of more than six months when sentiment for the greenback was hurt by political controversies surrounding President Donald Trump. The release of Trump’s first full budget plan on Tuesday and some hawkish comments from Philadelphia Fed President Patrick Harker, helped lift the dollar. There was a notable move in the dollar against the yen, which rose to test the key 112-yen level in Asian trading today, from yesterday’s sub-111-yen levels. The dollar index, which tracks the greenback against a basket of six major counterparts, rose back above 97 points, pulling away from its lowest levels since November.

In a speech in the US late on Tuesday, Fed voting member Patrick Harker said that he expects two more rate increases this year and that a hike in June “is a distinct possibility.”  The FOMC minutes of the May 3 Fed meeting are due to be released later today and the perceived hawkishness of these minutes are helping support the dollar.

The euro succumbed to profit-taking after a strong rally and ahead of ECB President Mario Draghi’s speech at a financial stability conference in Madrid today. The euro fell back below the key $1.1200 to $1.1170 in Asia today after a strong rally yesterday on upbeat Eurozone PMI data.

The loonie gave back some gains it made against its US counterpart as investors booked recent profits ahead of key risk events for the Canadian dollar. USD / CAD rose back above the key $1.3500 level. The Bank of Canada meets today and an important OPEC meeting is scheduled for tomorrow, where an extension of nine-months is anticipated to the current OPEC/non-OPEC deal on output cuts.

WTI oil traded above $51.50 a barrel in Asia today, holding gains after a five-day advance.

Gold prices are challenging the $1250 an ounce level, after slipping due to a broadly stronger greenback today.