FX market outlook

FX market outlook

Posted on Wednesday, October 25 2017 at 8:35 am GMT+0000

Aussie follows in the footsteps of its kiwi neighbor as it plunges after soft inflation numbers

The Australian dollar was the biggest mover of today’s Asian session as it plunged to 3-month lows versus the greenback after the announcement of third quarter inflation. Other major pairs were mostly holding around the previous session’s levels, with the US dollar preserving its gains.

Third quarter headline inflation for the country came in at 0.6% quarter-on-quarter, lower than the 0.8% expected by economists. Both the trimmed mean and the weighted mean measures, which are more closely followed by the Reserve Bank for its interest-rate setting, also missed expectations by coming in at 1.8% and 1.9% respectively. The fact that inflation is just below the RBA’s target range of 2-3% for yet another quarter, makes it less likely that an interest rate hike is going to happen in the near-term. The country’s benchmark rate is currently at a record-low 1.5%, but besides inflation there are worries that loose monetary policy could be causing the real estate market to overheat in the country’s key cities.

The Australian dollar fell to as low as 0.7715 against the US dollar, having fallen below the 0.78 mark on Monday. This was the lowest level for the aussie since July 13.

The New Zealand dollar, which was the big loser of the previous sessions due to the country’s new coalition government, managed to find some support around 0.69 against the greenback. The kiwi’s decline has slowed down but it will be interesting to see if it will manage to hold the 0.69 level for now.

In the United States, the US dollar has received a boost from reports that Professor John Taylor’s chances of becoming the next Fed chair have risen as he was endorsed by the majority of Republican lawmakers that met with President Trump during a luncheon on Monday. Powell and Yellen are still being considered, but Taylor is seen as the more hawkish option. This was just as well for the dollar as infighting in the Republican Party seemed to dim the chances that tax reform will be passed successfully in the next few weeks. Therefore relatively negative news about tax reform were balanced by some positive reports concerning the next Fed chair, which left the US dollar index near 2-month highs at 93.83. Euro/dollar was pinned around the 1.1750-65 level for most of the session, awaiting the crucial ECB meeting tomorrow. The rise of the US 10-year yield above 2.40% also supported the dollar against the yen as it remained near 3-month highs at 113.85 after failing to overcome the 114 level. Positive news either on tax reform or on a hawkish Fed chair nominee could push the pair to break this level.

Looking ahead, it will be a busy day with the German Ifo business confidence survey for October and the UK’s preliminary third quarter GDP being the highlights of the early European session. Durable goods orders and new home sales out of the US could move the dollar and bonds, while Canadian dollar traders will be intensely focused on the outcome of the Bank of Canada policy decision (no change in rates is expected but there could be a hawkish tone). US crude oil inventories a little later could move oil.