FX market outlook

FX market outlook

Posted on Tuesday, November 7 2017 at 9:30 am GMT+0000

Aussie gains little after RBA leaves rates unchanged; kiwi climbs on currency policy relief

Early on Tuesday, the RBA decided to hold interest rates steady at record low levels, retaining its confidence on economic growth and the labour market. The aussie, however, posted short-lived gains following the policy statement as weak inflation continued to worry policymakers. Meanwhile, in New Zealand, the Finance Minister said that targeting the currency was not the new government’s monetary goal, lifting the kiwi higher for a while.

In the wake of the RBA decision to keep rates at 1.5%, the aussie was on track to break the $0.77 key-level as the policy statement revealed that policymakers remained optimistic that GDP growth will approach 3% in the next few years, driving unemployment lower. A few minutes later, though, the currency dropped back to 0.7670 as the RBA Governor Philip Lowe expressed in the statement that inflation is projected to “remain low for some time, reflecting the slow growth in labour costs and competitive pressures”. On Friday, the central bank will also release its latest quarterly economic forecasts, giving a clearer picture of the inflation path.

The New Zealand dollar stretched yesterday’s uptrend, reaching a high of $0.6952 before it slipped back to $0.6920 after the Finance Minister, Grant Robertson, admitted that the new government has no plans to target the currency as part of its monetary policy framework, but instead has a desire to maximize employment, while publishing minutes of the Reserve Bank’s policy meetings was also under consideration.

The greenback rebounded to 94.86, being 0.14% up on the day as markets continued to price a third Fed-rate hike in December despite questions remaining on whether the US tax overhaul will succeed to pass through Congress. Uncertainties also arise from how the Fed board will be formed after the New York Fed President, William Duddley – known as the most influential dove policymaker – retires from his role in mid-2018 before his term officially ends in January 2019. Dollar/yen climbed by 0.40% to 114.13, reversing partially yesterday’s losses.

Dollar/loonie bounced from the two-week low of 1.2694 touched yesterday on the back of higher oil prices, last trading at 1.2729 (+0.21%). Loonie traders will also focus on BOC Governor, Stephen Poloz’s speech later today.

In Germany, industrial production decreased sharply by 1.6% m/m in September, while analysts anticipated a softer contraction of 0.8%. In the previous month, German manufacturing output rose substantially by 2.6%. Following the data, the euro broke below the $1.16 key-level to $1.1590 before the session-end (-0.15%).

Next on the day, investors will keep a close eye on ECB chief Mario Draghi’s speech at the 2nd ECB Forum on Banking Supervision “Europe’s changing banking landscape” in Frankfurt, Germany, as well as on retail sales readings out of the Eurozone.

The pound was weaker by 0.16% at $1.3148 as Brexit-related developments were weighing on the currency.

Turning to commodities, oil prices continued to fluctuate around two-year highs while gold pared some its yesterday’s gains. WTI crude was flat at $57.35 per barrel and Brent was slightly up at $64.39. Gold pulled back by 0.23% to $1,278.80 per ounce.