FX market outlook

FX market outlook

Posted on Monday, November 14 2016 at 8:44 am GMT+0000

Dollar rises to 5-month  high above 107 yen .

The US dollar received another boost at the start of the new trading week as the Trump factor continued to dominate markets. His plan for fiscal spending, trade restrictions and anti-immigration policies could result in a combination of higher inflation and an increase in the pace of Fed rate hikes, which would boost the dollar.

A rise in the dollar/yen pair to a five-month high of 107.64 yen helped lift the greenback across the board in today’s Asian session.

The euro extended losses versus the dollar to reach its lowest since January at $1.0772. The single currency is being weighed by potential risk events in the Eurozone. An upcoming referendum in Italy could topple Prime Minister Renzi and there are concerns the populist party called the Five Star Movement could gain more power and call for Italy to leave the EU.

Bond yields moved higher because when there is an expectation that inflation will rise, investors go to higher yields. The US 10-year Treasury note yield rose to a 10-month high of 2.2% in Asia. Meanwhile, the Australian yield reached its highest since January.

The Australian and New Zealand dollars slipped to near one-month lows. The aussie is losing its allure of the carry trade and fell against its US counterpart to $0.7523 in Asian trading.

The New Zealand dollar also weakened against the greenback to $0.7074, a level not seen since October 17, after a strong earthquake hit New Zealand over the weekend, killing at least two. There is speculation that the RBNZ (central bank) could ease policy further and this weakened the currency.

Economic data out during the Asian session today included a string of data out of China. The overall picture showed a steady Chinese economy but some of the data today missed estimates. Industrial production rose 6.1% year-on-year in October versus a 6.2% estimate. Retail sales also fell short of forecasts as they slowed to 10% year-on-year in October versus 10.7% expected. Fixed asset investment beat estimates to rise 8.3% year-on-year in October versus 8.2% expected.

In other data, Japan’s preliminary quarterly GDP for the third quarter was up by 0.5% versus 0.2% expected and higher than the previous quarter. Bank of Japan Governor Haruhiko Kuroda spoke today and warned of downside risks to inflation and economy. He reiterated that the BOJ will pursue powerful monetary easing and make policy adjustments as appropriate. 

Meanwhile, as the BOJ keeps monetary policy loose, the Fed is on track for hiking rates and this widening interest – rate differential is favouring the dollar versus the yen and helping USDJPY higher.

Gold fell to a five-month low of $1212.60 an ounce due to a stronger US dollar. The two assets tend to have an inverse price relationship.

The economic calendar is light for the rest of the day, with only Eurozone industrial production numbers due and there are no major US data releases.