FX market outlook

The dollar made up all the losses in view of Friday’s softer-than-expected employment report, as optimism returned about the health of the US economy and the increasing probability of a December rate hike.  Sterling on the other hand was losing the ground it regained following the flash crash on concerns about the impact of Brexit.

In economic data, Japan’s current account surplus climbed to 2 trillion yen in August, higher than economists’ expectations of a 1.5 trillion figure.  The higher figure was due to falling imports according to Ministry of Finance data, which did not look good for Japan’s economic prospects.  Dollar / yen briefly traded above the 104 level at 104.06, close to its highest in 2 ½ months.  It was last at 103.88.

Euro / dollar traded as low as 1.1111 before a small rebound to 1.1125, as investors continued to be more optimistic about the US economy and the chances of a rate hike.  Chicago Fed President Charles Evans said in a speech that a December rate hike would not be a surprise while he also said that the latest jobs report was a pretty good number.  The market was slightly disappointed on Friday that key measures such as nonfarm jobs and the unemployment rate failed to meet or beat estimates.  The European Central Bank on the other hand was seen holding its asset purchase program steady for now and continuing to charge negative interest rates for balances held at the central bank.

Growing expectations that the US election would not bring about a surprise result might also have limited some of the political uncertainty and boosted the chances of a December rate hike.

Commodity currencies such as the aussie and the kiwi were also under pressure from the resurgent greenback.  The Australian dollar dropped below 76 US cents to 0.7560 while the New Zealand dollar dropped to 0.7073.

Sterling was challenging the 1.23 level versus the dollar at 1.2317 and the currency could challenge its post-flash crash low of 1.2226.  Sentiment was negative on sterling on worries that the nation was heading towards a ‘hard Brexit’ i.e. reestablishing full control of its immigration policies while giving up preferential access to the EU’s Single Market in goods, services and capital.  The euro was unable to make as much progress as the dollar against sterling, as euro / pound only rose to 0.9035.

Oil was very near a 3 ½ month high as it rose to as high as $51.58 per barrel.  There was optimism that Russia would coordinate with OPEC to enforce production limits after statements by President Vladimir Putin in an energy forum in Istanbul.

Looking ahead, the ZEW German economic sentiment index for October will be the day’s key data point and it is expected to show an improvement to 4.3 from the previous month’s 0.5.  There will be little in the way of major data releases during the rest of Tuesday, with the market eagerly awaiting Wednesday’s Fed meeting minutes.