FX market outlook

FX market outlook

Posted on Wednesday, October 18 2017 at 8:57 am GMT+0000

Eyes on Chinese communist party conference; loonie, Mexican peso jump as NAFTA talks extend

Markets turned their focus on China on Wednesday, as China’s President Xi Jinping welcomed the biggest political event in the country, the Communist Party Congress, which plays a key role in the global economy. Meanwhile, the announcement of NAFTA talks extending to next year gave room for improvement to the Canadian dollar and to the Mexican peso.

The Chinese President XI Jinping opened the twice-in-a-decade and closed-door Communist Party Congress in Beijing on Wednesday, with investors expecting the leaders of the world’s second-largest economy to announce any policy updates involving political, economic and defense reforms for the next five years. Jinping, giving a three-hour speech, pledged to turn China into a leading global power in 2050 despite “severe challenges” lingering in the economy. Moreover, he advised the government not to copy any foreign political strategies, mentioning that the country has entered “a new era of socialism with Chinese characteristics” while regarding global provocations, he argued that a “Cold war mentality should be avoided”.

The aussie, which is highly correlated with developments in China, reacted little to the data, rebounding to $0.7845 and remaining mainly steady on the day after the leading index which predicts the direction of the economy jumped from -0.1% m/m to 0.1% in October. Its New Zealand cousin declined by 0.28% to $0.7149 despite the kingmaker First Party saying it will make an announcement on government formation on Thursday.

With the fourth round of NAFTA talks failing to make progress ahead of an expiration date in December, the US Trade Representative Robert Lighthizer, the Mexican Economy Minister Ildefonso Guajardo and the Canadian Foreign Minister Chrystia Freeland decided on Tuesday to extend negotiations to the end of March 2018 as well as to give more time between rounds for representatives to examine suggestions.

Following the news, the loonie gained approximately 0.40% against the greenback, with dollar/loonie retreating from 1.2554 prior to the announcement on Tuesday to last trade around 1.2505 in the Asian session. The Mexican peso posted the largest gains in 4 ½ -months, surging by 1.5%. Dollar/peso changed hands at a four-day low of 18.75.

The dollar index bounced by 0.10% to 93.57, gaining on speculations that the US president might select a hawkish candidate as the next Fed chair after the term of the current chairwoman, Janet Yellen, expires in February. Recall that Yellen will hold an interview with Trump on Thursday. Besides that, Senators Lamar Alexander and Patty Murray reached a deal on health care which would allow states to adopt Obamacare according to their needs. However, the deal does not loosen any of the Obamacare regulations which has been the main target of the Trump administration.

Dollar/yen moved up by 0.20% to 112.39 ahead of the Japanese snap elections on October 22.

The pound was down by 0.16% following dovish comments by BOE members yesterday at the Parliament, including the BOE chief, Mark Carney. Today, employment data will be due out of the UK during the European trading hours, while the British Prime Minister, Theresa May, will give a pitch to EU leaders on Thursday ahead of the EU summit on Friday to initiate momentum in Brexit negotiations.

The euro was moving sideways around $1.1764 pressured by political risks in the Eurozone, with traders eagerly anticipating whether the Catalan leader, Charles Puigdemont, would step back from independence on Thursday after missing the first deadline on Monday. a speech by the ECB chief, Mario Draghi will be also in focus later today.

In commodities, oil prices were in an uptrend after the API weekly report on US inventories showed a larger fall in crude oil stocks of 7.130 million barrels, while projections were for a reduction of 4.200 million barrels. WTI crude was up by 0.52% at 52.15 per barrel and Brent climbed by 0.78% to $58.22 per barrel. Gold slipped by 0.12% to $1,2830 per ounce.