FX market outlook

FX market outlook

Posted on Tuesday, September 5 2017 at 8:43 am GMT+0000

Dollar consolidates; aussie retreats as RBA holds rates at record lows

The dollar entered a consolidation phase in Asia as investors remained nervous about North Korea’s possible future nuclear actions, while US markets provided little direction as they were closed for the Labour Day Holiday. Meanwhile, in Australia the RBA decided to keep its monetary policy unchanged, holding cash rates at record lows, but concerns over an appreciating exchange rate pushed the aussie down.

Investors preferred to put their money in safe-haven assets during the Asian trading hours and avoid riskier assets as they were worried that another nuclear test from North Korea could turn heightened tensions between the US and North Korea into a dangerous military conflict. The South Korean central news agency reported yesterday that North Korea is potentially preparing to fire another ballistic missile while today South Korea’s Asia Business Daily stated that Pyongyang was moving a rocket described as an intercontinental ballistic missile towards its west coast. This followed North Korea’s Sunday test of a relatively powerful nuclear weapon – considered as a hydrogen bomb – which provoked the US to threaten to terminate trade ties with nations collaborating with the North Korea as well as to impose stricter sanctions on the already isolated country. Moreover, US Defence Secretary James Mattis warned of a “massive military response” if Pyongyang threatened the US or its allies.

Besides that, traders will keep a close eye on the Fed’s policy meeting on September 19-20 and on debt ceiling discussions for potential support. The Congress must decide on the maximum amount the government can borrow before the September 29 deadline taking account the cost of the disastrous tropical storm Harvey. Later today, speeches by Fed officials Brainard and Kashkari might give clues on Fed’s actions.

The dollar consolidated near 92.50 against a basket of major currencies, while it reached one-week lows against the yen and the swiss franc. Dollar/yen touched a low of 109.14 before it rose to 109.41, while dollar/swissie bottomed at 0.9543 before it climbs to 0.9567. Regarding the safe-haven gold, it moved sideways during the Asian session around $1,335.61.

The euro was flat versus the greenback, hovering around $1.1904.

In the meantime, the Reserve Bank of Australia (RBA) concluded its policy meeting on early Tuesday. RBA policymakers decided to hold interest rates at the 1.5% record low as it was widely expected, while the monetary statement released afterwards indicated concerns over an appreciating currency. Particularly, the statement expressed that the dollar’s weakness kept the local currency strong which consequently restricted prices from rising. In addition, the central bank’s outlook for the economy remained positive with economic output and inflation increasing gradually as developments in the labor market are expected to lift subdued wages. Finally, the statement highlighted that housing markets which weigh on the economy have shown signs of cooling.

The aussie sank immediately after the monetary policy statement by 0.40% to $0.7947 but managed to climb to 0.7966 afterwards. However, prior the release of the statement, the aussie hit a session high of $0.7984 after the Australian trade surplus and the Chinese Service Caixin PMI came in better than expected. Net exports grew surprisingly by 0.3% in the second quarter while analysts anticipated the figure to narrow by 0.05%. In the first quarter, net exports dropped by 0.7%.  China, Australia’s biggest export partner also posted stronger service activities in August, with the Caixin service PMI increasing by 1.2 points to 52.7.

The kiwi, which is positively correlated with the aussie, was in an uptrend during the session, edging up by 0.18% to $0.7172.

The pound ticked up to $1.2936 after a steep fall yesterday which drove the currency to an intra-day low of $1.2911 following the comments of the UK’s finance minister Phillip Hammond who warned policymakers to avoid delaying EU withdrawal legislation as this would harm the country’s relations with the European Union.

Dollar/loonie declined by 0.19% to 1.2394 ahead of the Bank of Canada’s monetary policy tomorrow, where expectations are for the rates to remain unchanged. However, a rate hike is not out of the plans based on upbeat economic conditions in the country.

Regarding oil prices, WTI crude was up by 0.53% at $47.55 per barrel, as Texas energy refineries were in recovery. Brent was down by 0.11% at $52.28 per barrel.