FX market outlook

FX market outlook

Posted on Wednesday, September 6 2017 at 8:20 am GMT+0000

Dollar tumbles as North Korea promises a “gift of packages”; aussie retreats on disappointing GDP growth

On Wednesday, markets continued being in a risk-averse mood as a North Korean diplomat warned the day before that more is coming from his country. However, in the US the focus turned to domestic policies, as Fed policymakers are preparing for their next meeting in two weeks’ time. With geopolitical risks in the background, the dollar weakened further following the dovish comments made by the Minneapolis Fed President Neel Kashkari. Meanwhile, the aussie lost steam after the GDP growth data appeared lower than expected.

Late on Tuesday, comments by a top North Korean diplomat enhanced the already heightened geopolitical tensions. Han-Tae-Song, who is also the North Korean Ambassador to the United Nations, threatened that the DPRK will deliver more “gift packages” to the US as long as the latter uses provocative actions to put pressure on the country. In the same day, the Russian president, Vladimir Putin, claimed that additional sanctions would lead “nowhere” while he advised that a dialogue between the countries would be more effective.

Back in the US, dovish remarks by Minneapolis Fed President Neel Kashkari who reiterated yesterday that the recent rate hikes might be a “real harm” to the economy, adding more losses to the greenback. However, early in the Asian session comments from the Dallas Fed President Robert Kaplan, gave some support to the dollar as he argued that the damage from the tropical storm Harvey might slow down the economy but will not affect the Fed’s decision to start reducing the $4.5 trillion balance sheet “as soon as next month”. He also mentioned that additional information would be needed before the central bank proceeds with a third hike this year.

The pound paused its uptrend against the dollar which drove the currency near to one-month high of $1.3043 early in Asia, moving sideways around 1.3019 later on. This came after the Brexit minister, David Davis, said late on Tuesday that Britain and the European Union have very different legal opinions on the divorce bill. Note that both sides are launching the fourth round of talks on September 18 after the third round concluded last week indecisive in many major topics including most importantly the UK’s financial obligations before it exits the bloc on March 2019.

In terms of data, Australian GDP growth figures for the second quarter missed expectations a day after the Reserve Bank of Australia decided to hold cash rates at the record low of 1.5%. Quarter-on-quarter, the Australian economy expanded by 0.8% compared to 0.3% seen in the previous quarter, though this was below the estimate of 0.9% expected by analysts. On a yearly basis, GDP growth increased by 0.1 percentage points to 1.8% but fell short of forecasts which anticipated a growth rate of 1.9% instead. Consumption increased by 0.2 percentage points in the second quarter to 0.8%, while capital expenditure rose by 1.5% from 0.4% (upwardly revised from -0.6%) seen in the previous quarter.

The aussie retreated from the one-month high of $0.8020 it touched on Tuesday to $0.7980.

The kiwi also ticked down to $0.7219 after it reached a one-week high of $0.7262 a day before, supported by higher global dairy prices which rose by 0.3% in September compared to a reduction of 0.4% in August as well as by the positive view on the Australian economy (given the relationship between the New Zealand and Australian economies).

The loonie was down by 0.19% with dollar/loonie climbing to $1.2392 before the markets close. The currency is expected to fluctuate after the Bank of Canada decides on interest rates later today.

Regarding commodities, oil prices were mixed while gold recorded some gains. WTI crude rose by 0.16% to $48.74 per barrel while Brent declined by 0.09% to $53.33. Gold was up by 0.03% at $1,338.60.