FX market outlook

FX market outlook

Posted on Tuesday, November 21 2017 at 9:20 am GMT+0000

Euro weakness on political risks supports dollar; aussie down after RBA minutes

Trading conditions were thin on Tuesday as economic releases were few, while the US was in a holiday mode ahead of the Thanksgiving Day on Thursday. Japan is also celebrating its Labour Thanksgiving Day on Thursday. The dollar remained steady at one-week high levels during the session as political noise in Germany continued to weigh on the euro. The aussie touched a five-month low after the RBA meeting minutes signalled concerns on subdued wage growth.

The euro recouped some of its losses made yesterday in Asia, trading flat around $1.1741 as investors retained their confidence on Eurozone’s relative economic outlook. But the cloud surrounding Germany’s political environment restricted larger gains following the collapse of the coalition talks on Sunday. The German chancellor, Angela Merkel, said on Monday she would prefer to go through new elections rather than rule a minority government. A few hours earlier, the German president urged parties to resume coalition negotiations, hinting that he did not prefer fresh elections.

Meanwhile in the US, the Fed chair, Janet Yellen said she would step down from the Fed board after Jerome Powell, who was nominated as her successor, earlier this month takes the role. Note that Yellen’s term as a board governor expires at the end of January 2024. This brought some volatility to the market as the US president would now have to fill four seats in the board of governors including the position of the Fed vice chairman.

With the focus pulling away from the US tax developments for the moment as any progress on the tax plan is not expected before the Thanksgiving holiday, the dollar index inched down by 0.10% to 93.85 but remained close to one-week high levels. Higher Treasury yields also supported the greenback, with the two-year yields surging to a nine-year high overnight. Dollar/yen edged down by 0.12% to 112.48 and gold rose by 0.30% to $1,280.40 per ounce.

Attention will now turn to Fed meeting minutes due on Wednesday, where investors will be eager to identify any clues on the path of interest rates.

Elsewhere, minutes of the RBA’s meeting in October released early today showed that central bankers were worried that faster-rising employment would not translate into higher wage growth – a fact that is also observed in Japan, the US and the UK. This suggested that interest rates might stay at the current record low levels for longer as Australian households are also highly indebted. The aussie slipped to a fresh five-month low of $0.7531 in the wake of the statement, being 0.09% down on the day. Remarks by the RBA Governor, Philip Lowe, expected at 0900GMT will be also in focus.

The kiwi declined as well, falling by 0.10% to $0.6802 as dairy producers in New Zealand reported higher milk output in October, raising fears of a potential milk oversupply ahead of a global dairy auction.

In energy markets, oil prices increased amid expectations that the OPEC and non-OPEC members will agree to extend supply cuts in their next week’s meeting. Yet, rising output in the US and doubts about whether some members will indeed continue to curb their production limited upside price movements in the market. WTI crude was up 0.30% to $56.59 per barrel and Brent picked up by 0.48% to $62.52.