FX market outlook

FX market outlook

Posted on Thursday, August 31 2017 at 8:34 am GMT+0000

Dollar extends gains as economic confidence rises; Aussie weaker after CAPEX; Kiwi hits 2 ½ – month low

The dollar had a relatively winning battle against its peers overnight, extending its positive momentum after investors restored their confidence in the US economy despite geopolitical risks remaining high and huge damages from the ongoing tropical storm Harvey. On the other hand, the Australian dollar performed poorly, failing to find support on positive economic data, while the Kiwi was the worst performer after figures out of New Zealand came in disappointing.

While waters continued rising in southeast Texas and slow-moving powerful Harvey entered southwest Louisiana, causing death to at least 35 people and damage amounting to tens of billions of dollars, the greenback stretched its uptrend, digesting yesterday’s upbeat data out of the country. Second estimates for GDP growth showed on Wednesday that the economy surprisingly expanded by a 3% pace, recording the fastest growth in a year. ADP National Employment report showed yesterday as well that employment in the private sector rose unexpectedly by 237,000 in August, signaling that non-farm payrolls, expected to be released on Friday, might also surprise to the upside.

Moreover, Trump during his first major speech on tax reforms on Wednesday in Missouri reiterated that corporate tax cuts are necessary to boost employment in America. The president called for corporate taxes to be reduced to 15% from 35%. On the same day, Trump, commenting on North Korea’s most dangerous missile test which crossed above Japan and landed in the Pacific Ocean, said that “talking is not the answer” while the US defense secretary Jim Mattis stated afterwards that “We are never out of diplomatic solutions”.

Later in the day, investors will keep a close eye on core PCE price index, initial jobless claims and pending home sales for additional evidence on the improving US economic conditions.

Dollar/yen jumped to a two-week high at 110.61 in the Asian session before it retreated to 110.52. Meanwhile, preliminary numbers on Japanese industrial production for the month of July, published earlier today, indicated that on a monthly basis, industrial output turned negative, decreasing by 0.8% and missing the forecast of a 0.5% fall. In June, industrial production increased by 2.2% m/m.

The euro extended its downtrend on the back of a stronger dollar ahead of the ECB policy meeting next week. Although recent figures out the area pointed to sustainable economic growth, ECB policymakers are anticipated to think twice about giving hawkish signals as they are now more concerned about euro’s strength. Note that, euro/dollar reached 2 ½ -year high of 1.1295 on Monday.

In Australia, new capital expenditure(CAPEX) was better than expected in the second quarter. While analysts forecasted businesses to spend 0.3% q/q more on new capital, the actual spending stood higher at 0.8%. However, this was below the previous mark of 0.9% which was revised upwards from 0.3%.

Moreover, Australia’s biggest export partner, China, released its PMI readings for the month of August. Manufacturing PMI edged up by 0.3 points to 51.7, surpassing the 51.3 forecasted. In contrast, non-manufacturing PMI declined by 1.1 points to 53.4.

The aussie retreated by 0.09% versus the greenback to $0.7899.

The kiwi performed poorly relative to its counterparts, sinking by 0.56% to a 2 ½ -month low of $0.7143 before it inched up to $0.7162. This came after the business confidence index in New Zealand disappointed markets, decreasing by 1.1 points to 18.3 in August. Besides that, recent remarks from RBNZ Governor Graeme Wheeler that a lower New Zealand currency was needed, weighed on the kiwi.

Turning to commodities, crude oil prices and gold were lower. WTI crude edged down by 0.02% to $45.95 per barrel, while Brent dropped by 0.20% to $50.76. Gold fell by 0.20% to $1305.80 per ounce.