FX market outlook

FX market outlook

Posted on Wednesday, September 27 2017 at 8:58 am GMT+0000

Dollar stronger on hawkish Yellen but eyes on tax plans; kiwi weak ahead of RBNZ meeting

Fed Chair Janet Yellen, held a hawkish stance on the Fed’s rate path on Tuesday, boosting the dollar to a fresh one-month high against a basket of major currencies. On Wednesday, dollar sentiment is expected to be positive as markets anticipate the Congress to welcome Republicans’ tax plans after Senate Republicans failed again to replace Obamacare. Meanwhile, the focus will be also on the policy meeting held by the Reserve Bank of New Zealand (RBNZ) later today.

The dollar index stood tall at a fresh one-month high of 93.07 on late Tuesday before it edged down to 92.97 in Asia today after Fed Chair Janet Yellen said in Cleveland that interest rates should continue rising gradually despite weakness in inflation. Particularly she commented that “it would be imprudent to keep monetary policy on hold until inflation is back to 2%”.

Today though, the biggest focus will be on Republicans’ tax plans expected to be received positively by Congress after six months of intensive work by six White House members and congressional Republicans. Yesterday, Trump asked both US Republican and Democrat lawmakers to collaborate on a tax framework saying that “it is time for both parties to come together”. This came after Trump team’s efforts to repeal Obamacare on the same day failed for the second time when Senate members from the same team opposed the administration’s healthcare bill.

Sources familiar with the topic said that Trump’s Republicans are due to suggest a new “pass-through” tax rate of 25% on Wednesday from the current 39.6%, while they are also considering asking for corporate income taxes to be cut from 35% to a target range of 18-23%.

Meanwhile, Trump referring to North Korea’s latest threats on Tuesday eased war tensions, saying that a military response is not America’s “preferred option”, but if needed that would be “devastating” for the North Korean regime.

Safe-haven assets weakened after Trump’s words, with dollar/yen rising by 0.35% on the day to 112.62 and dollar/swissie climbing by 0.40% to 0.9725. Gold retreated by 0.12% to $1,291.60 per ounce.

In Paris, the Pro-European centrist French President Emanuel Macron reiterated his vision on higher EU integration, calling for EU members to unify their efforts on defense and immigration and for the eurozone to have its own budget. However, his ambitious ideas might fall on deaf ears as he will struggle to find support from his German counterpart, Angela Merkel, who is considering to build a coalition with Eurosceptic parties. The coalition-building process in Germany might take from weeks to months.

Euro/dollar touched a fresh one-month high, dropping to 1.1756 amid uncertainties around the German political environment.

In other currencies, the kiwi reversed earlier gains made in Asia before Asian markets close, falling to $0.7178. Kiwi traders will also be cautious on the RBNZ policy meeting later today where forecasts are for interest rates to remain steady at a record low of 1.75% until the end of the year.

In other news out of New Zealand, the leader of the First party, Winston Peters, argued that no coalition agreements would be made until final general election votes, which include overseas ballots, are released on October 7.

The aussie was down by 0.47% at $0.7849, pressured by decreasing metal prices including iron ore which is Australia’s main export.

Dollar/loonie was up by 0.33% ahead of the BOC’s Governor Stephen Boloz’s speech later today.

Regarding oil prices, WTI crude jumped by 0.69% to $52.24 per barrel and Brent rose by 0.48% to $58.72 after the API weekly report indicated that US crude inventories declined by 0.761mn barrels in the past week compared to a rise of 3.40mn barrels expected.