FX market outlook

FX market outlook

Posted on Monday, December 18 2017 at 9:48 am GMT+0000

US tax reform dominates attention; appetite for risk pushes equities higher

Here are the latest developments in global markets:

·         FOREX: The dollar was slightly down against a basket of currencies after posting gains on Friday following the announcement that House and Senate Republicans have found common ground on the front of tax legislation. The antipodeans were again gaining ground versus the greenback.

·         STOCKS: The Nikkei 225 added 1.55% and the Hang Seng was higher by 1.0% on a day when Asian equities were mostly on the rise on the back of positive sentiment following US tax reform momentum. Euro Stoxx 50 futures were up by 0.7% at 0725 GMT, while Dow, S&P 500 and Nasdaq 100 contracts traded higher by 0.45%, 0.3% and 0.4% respectively.

·         COMMODITIES: WTI and Brent crude were both up by 0.6%, at $57.66 and $63.63 per barrel respectively. Gold was slightly higher at $1,256.20 an ounce.

Major movers: Dollar not much changed as markets await tax vote; antipodeans on the rise

The dollar index was down, though not by much, trading at 93.87. Following the latest developments on tax reform, it looks increasingly likely that Congress will pass the relevant bill this week. The bill will subsequently be send to President Trump for it to be signed.

Dollar/yen was 0.1% higher at 112.68, though the US currency was losing some ground relative to the euro and the pound. Euro/dollar and pound/dollar traded up by 0.1% and 0.2%, at 1.1770 and 1.3345 respectively. Still, both pairs were at a distance to recently tracked highs.

Long-term Treasury yields not edging higher, at least not to a significant extent, also didn’t allow the dollar to post stronger gains.

Towards the end of last week, Germany’s Social Democrats agreed to get into talks with Merkel’s Christian Democrats on forming a government. In the absence of anything concrete and given that talks are expected to begin with the start of the new year, eurozone’s common currency didn’t get much of a boost on the back of the news.

The antipodean currencies maintained last week’s positive momentum, a week during which the aussie added 1.9% and the kiwi 2.2% versus the greenback. Aussie/dollar and kiwi/dollar were up by 0.3% and 0.5% on the day, at 0.7024 and 0.7667 respectively. The aussie was trading around one-month high levels and the kiwi around two-month high levels.

In emerging markets, dollar/rand retreated sharply on Friday – and was last trading close to Friday’s low at 13.1268 – on relief that South African Deputy President Cyril Ramaphosa was likely to be nominated as the next chief of the African National Congress, South Africa’s ruling party. Investors feared that Nkosazana Dlamini-Zuma, the ex-wife of South African President Jacob Zuma who was involved in numerous scandals, could be ANC’s next leader and likely the country’s next president after elections take place in 2019. Earlier in the day, dollar/rand fell below the 13 handle to record its lowest in three months.

Day ahead: May to propose plans on transition period; EU final inflation numbers ahead

Eurozone’s final inflation figures for the month of November due at 1000 GMT will be gathering attention, with analysts expecting consumer prices to keep growing below the ECB’s target of 2.0%. Annually, headline CPI is anticipated to inch up by 0.1 percentage points to 1.5% y/y and remain flat on a monthly basis at 0.1% m/m.

December’s industrial trends measured by the British CBI business organization will follow at 1100 GMT. Recall that in November, the index which tracks economic expectations of the manufacturing executives in the UK, surprisingly bounced by 19 points to +17, reaching its highest since 1988.

In other news out of the UK, the Prime Minister, Theresa May, who managed to break the deadlock in Brexit negotiations at the two-day EU summit in Brussels last week, will head to the British parliament on Monday to inform lawmakers about her latest talks with the EU and present her plans on the transition period which aim to limit a cliff-edge scenario for individuals and businesses after the country departs from the EU block.

In the US, eyes will be on the tax legislation as markets remain confident that the proposed-by- Republicans tax cuts will pass the Congress as soon as this Tuesday after the Senate and the House lawmakers added the final touches on tax overhaul on Friday. Furthermore, Republicans hope for the bill to be signed by the US President, Donald Trump, by the end of this week.