FX market outlook

FX market outlook

Posted on Monday, October 9 2017 at 9:14 am GMT+0000
Dollar holds weak amid fresh threats from North Korean peninsula; pound strengthens ahead of May’s speech

On Monday, the dollar could not recover from Friday’s losses as North Korean tensions came back to the spotlight and as liquidity was limited during the session with South Korea, Japan, and China being closed for holidays while US markets will be partially shut for Columbus Day.

Although the report on US nonfarm payrolls released on Friday raised hopes for a third hike in December as wage growth picked up unexpectedly and the unemployment rate retreated further, renewed US-North Korea tensions gave a breather to the dollar and support to safe-haven assets. Particularly, traders were cautious after Russian lawmakers returning from North Korea, reported to Russia’s RIA news that Pyongyang was preparing another missile test in the near-term, which has the power to reach the west coast of the US.

The dollar, which immediately gave up gains made from nonfarm payrolls after the news on Friday, continued retreating in Asia, falling to 93.58 against a basket of major currencies after touching a 2 ½ – month high on Friday. Against the yen, the dollar also dropped from 2 ½ month highs, trading flat at 112.68 during the session. The safe-haven gold jumped by 0.35% to $1,279.70 per ounce.

An arrest of a US consulate employee in Turkey made the US and Turkey suspend visa services for citizens visiting those countries and hence escalated tensions between the countries. As a result, the dollar surged by 3.2% against the Turkish lira to 3.7694, posting the highest mark since July 2016.

While the Catalan leader, Carles Puigdemont, is preparing to address the Catalan Parliament on Tuesday, in an attempt to achieve unilateral Independence from Spain, a crowd of thousands of people in Catalonia’s capital Barcelona, demonstrated against breaking away from Spain on Sunday, widening divisions over the issue. Meanwhile, Spain’s Prime Minister, Mariano Rajoy, reiterated in an interview on Sunday he would not let independence to happen, saying that “we will take whatever decision that we are permitted to by law, in view of how things are unfolding”.

In other news, Eurogroup leaders will meet today to share views on the future role of the European Stability Mechanism.

Euro/dollar held steady at 1.1726.

Brexit talks are due to enter the fifth round today in Brussels, while UK Prime Minister Theresa May is due to express her optimism on negotiations in front of British lawmakers on Monday after her leadership was put in question following her poor speech at the annual Conservative party, last week, which she admitted was “uncomfortable”. Besides that, May said on Sunday that she is considering to demote the UK Foreign Minister, Boris Johnson, insisting that she will not “hide from a challenge”. The pound gained 0.33% on the day, last seen at $1.3107.

The Aussie weakened moderately against its US counterpart, slipping down to 0.7759 after the Chinese Caixin index for service activities came in worse than expected.  The index fell by 2.1 points to a 21-month low of 50.6, missing expectations of 53.1.

Final general election votes released on Saturday in New Zealand failed to give a majority to a single party, with the ruling National Party attracting 56 sits and the opposition’s Labour and Green holding together 54 sits. This leaves the decision of coalition again to the smaill nationalist First Party. The kiwi dropped to a 4-month low of $0.7056 in the first Asian trading hours before it edged up to 0.7076, remaining 0.20% down on the day.

In energy markets, oil prices recovered slightly from Friday’s sharp losses of 2% as markets expect Saudi Arabia to continue restricting its output, while the US Baker Hughes oil rig counts showed that US active oil drilling dropped from 750 to 748 in the week ending October 6. Moreover, several oil refineries in the Gulf of Mexico remained shut on Monday after hurricane Nate passed the area during the weekend, causing minor damage. WTI crude was trading 0.22% up on the day at $49.40 per barrel and Brent moved higher by 0.25% to $55.76.