FX market outlook

FX market outlook

Posted on Tuesday, January 2 2018 at 9:56 am GMT+0000

Dollar continues to tumble as commodities extend gains; Manufacturing PMIs in focus

Here are the latest developments in global markets:

  • FOREX: The dollar traded lower against a basket of major currencies, with the USD index touching a 3-month low.
  • STOCKS: Asian markets started the year on a strong footing, with Hong Kong’s Hang Seng being up nearly 1.9%, while China’s CSI 300 was 1.40% higher, possibly boosted by the better-than-expected Chinese Caixin manufacturing PMI for December released earlier. In Japan, equity markets (Nikkei 225, Topix) will remain closed until Thursday. At 0732 GMT, Euro stoxx 50 futures were 0.17% higher, while futures tracking the Dow Jones, S&P 500 and Nasdaq 100 were all slightly in the green as well.
  • COMMODITIES: WTI and Brent crude were up 0.4% and 0.5% respectively, extending their recent gains. WTI is currently trading near $60.88 while Brent is at $66.68 per barrel, both highs were last seen in 2015. Dollar-denominated gold traded 0.5% higher to touch the $1310/ounce mark before pulling back slightly, likely lifted by the continued weakness in the greenback and the anti-government protests in Iran.

Major movers: Greenback slips to a 3-month low; commodity-linked currencies extend gains

The US dollar continued to lose ground against its major counterparts to start the year, with the dollar index currently trading near 92.10, its lowest level since late-September. Both euro/dollar and sterling/dollar were up roughly 0.2%, while dollar/yen was trading practically unchanged.

Dollar/loonie was down a little more than 0.1%, with the Canadian currency possibly enjoying increased demand due to the surge in oil prices. The latest leg up in the precious liquid is being attributed to the rising political unrest in Iran, where anti-government protests continue for a sixth day. Considering Iran’s status as a major oil exporter, the protests may have been seen by market participants as increasing the risk of supply disruptions, in case the situation escalates further.

The rest of the commodity-linked currencies also advanced against the greenback, with aussie/dollar being up 0.4% and kiwi/dollar being almost 0.3% higher. The positive sentiment surrounding the antipodean currencies was likely amplified by the release of China’s Caixin manufacturing PMI for December overnight. The index came in notably higher than the consensus, which probably helped to alleviate some concerns that the world’s second-largest economy headed for a slowdown in economic growth. Good news out of China are usually positive for the aussie and the kiwi as China, Australia, and New Zealand have close trade relationships.

Day ahead: Manufacturing PMI numbers in the spotlight

The first trading day of the year will be light of economic releases and price actions are expected to be muted as markets will be partially open on Monday.

Looking at today’s economic events, final Markit manufacturing PMI readings for the month of December will attract some attention during the European session. At 0900 GMT the Eurozone final manufacturing PMI is anticipated to stand flat at a record high of 60.6, whereas the British measure due at 0930 GMT is said to inch down to 58.0 from a seven-year peak of 58.2 it hit in November. Note that British PMI numbers will be more important for the pound as flash estimates are not published for the UK. In the US, the Markit gauge of the level of the manufacturing activities is expected to remain unchanged at 55.0.

Investors will also keep a close eye on the kiwi as changes in global dairy prices reported today at a tentative time might bring some volatility to the currency.

In energy markets, the API weekly report which tracks oil inventories in the US will be published at 2130 GMT.

However, later on this week, preliminary inflation data out of the Eurozone on Thursday and Friday’s US non-farm payrolls will be much more of interest. The minutes from the December FOMC