FX market outlook

FX market outlook

Posted on Tuesday, September 26 2017 at 8:57 am GMT+0000

Safe havens gain ground as Pyongyang threatens to shoot down US jets; oil hits fresh highs

Geopolitical uncertainties became dangerous late on Monday giving a boost to safe havens during Tuesday’s Asian session. The North Korean Foreign Minister Ri Yong Ho used a stronger language against the US, saying that Trump’s recent comments were a declaration of war on the Korean peninsula and the regime has the right to shoot down US bombers even if they fly outside the regime’s airspace. A few hours later the White House spokeswoman Sarah Sanders denied that the US has declared war on North Korea, while the National Security Adviser H.R McMaster argued that the US is playing out four or five scenarios on how to deal with North Korean tensions admitting that warnings from the peninsula are “much further advanced” than anticipated.

Dollar/yen tumbled to 111.64 from 112.20 prior to the exchange of threatening words.

Dollar/swissie bottomed at 0.9641 on late Monday but managed to bounce up to 0.9697 afterwards due to the rising dollar.

Gold rose to $1,308.39 per ounce.

The dollar index climbed higher to 92.51 in Asia despite escalating geopolitical tensions after the New York Fed President William Dudley claimed on Monday that the Fed sees interest rates rising gradually given factors driving inflation lower are fading and US economic conditions are supportive. However, the Minneapolis Fed President Neel Kashkari who is a voting member this year commented early today that there is no need to hike rates as there is still no evidence of “inflation taking off”.

Next up today, Fed Chair Yellen is expected to give a speech before the FOMC members, Lael Brainard and Loretta Mester make public appearances later on. Moreover, new homes sales and Conference Board consumer confidence figures are anticipated to be released during the European trading hours.

The euro was hovering close to one-month low levels reached yesterday following ECB’s Draghi remarks which stated that currency volatility is a source of uncertainty which needs monitoring while he also added that “ample” ECB accommodation was still required. The German election outcome kept pressuring the currency with far-right AfD party entering the parliament for the first time and Merkel’s party seeking for new coalition partners after its current partner SPD decided to go to the opposition. Euro/dollar was last at 1.1853.

Sterling recovered from its ten-day low of 1.3430 touched yesterday, climbing to 1.3490 during the Asian session.

In other currencies, the kiwi stretched its downtrend, falling by 0.30% on the day to a two-week low of $0.7231 weighed mainly by uncertainties in the political environment as New Zealand’s Prime Minister who was the winner of the elections for the second time on Saturday must negotiate with other parties to build a coalition government. Moreover, worse than expected trade data for the month of August and disappointing ANZ business readings released early today pressured the kiwi even further. Thursday sees the decision by the Reserve Bank of New Zealand.

Its Australian cousin was slightly up at $0.7941.

The loonie continued weakening for the third week on the back of a stronger dollar despite increasing oil prices. Dollar/loonie was last trading at 1.2370 ahead of the BOC’s Governor Stephen Poloz speech on Wednesday.

Looking at energy markets, WTI crude oil and Brent touched fresh highs amid stronger joint compliance from OPEC and non-OPEC producers in order to reduce supply as well as the threat by Turkey’s President, Tayyip Erdogan, to cut oil flows from Kurdistan to the rest of the world. The warning came as a response to Kurdistan’s independence referendum held on Monday which passed off peacefully across the region. WTI crude rose to a five-month high of $52.40 per barrel while Brent reached a two-year high of $59.47. The API weekly crude report released later in the day is also expected to bring some volatility to oil prices.