FX market outlook

FX market outlook

Dollar adds to gains versus yen, oil jumps on hopes of OPEC deal.

 
The US dollar added to last week’s gains and rose above the 111 yen level in Monday’s Asian session as investors expect the Federal Reserve to hike rates in December. Oil was in focus today as prices jumped on hopes of a production cut deal at an OPEC meeting next week in Vienna.

The dollar’s strength continues to dominate the currency markets and the chances of the Fed increasing rates next month have surged since Donald Trump won the US elections. His pledge to boost infrastructure spending has led to increased inflation expectations, which has in turn fueled bets on further Fed policy tightening in 2017. Last week, Fed Chair Janet Yellen said in a Congressional testimony that a rate increase was likely “relatively soon.

The dollar index, which tracks the US currency against a basket of six major currencies, continued to trade near 13-1/2-year highs above 101 points. On Friday the index hit its highest since March 2003.

The yen has been one of the biggest casualties of the dollar’s strong rally on the growing divergence of the Fed’s and the Bank of Japan’s monetary policies.

The dollar rose to 111.17 yen in the Asian session today, its highest since May 31. The greenback’s rally may lose some steam though ahead of the US Thanksgiving holiday later in the week. Meanwhile, investors may take on a more cautious stance ahead of the Fed minutes that are due on Wednesday.

The euro struggled near 11-month lows against the dollar but remained steady in the Asian session to test the key $1.0600 level.

Aside from the Japanese yen, the Australian dollar has also lost a considerable amount against the US dollar since the US election, losing around 5%. The expectation of higher US interest rates has led to the aussie losing some of its allure as a carry trade. AUDUSD slipped to a 5-month low of $0.7310 in the Asian session.

Gold prices edged up slightly today to reach a high of $1213.81 an ounce.

Oil prices jumped back up today, with Brent crude reaching $47.51 a barrel and WTI climbing to $47.02 a barrel. Oil has rebounded since hitting the lowest in almost two months earlier this month, on hopes that OPEC will finalize an output deal at a meeting on November 30 in Vienna. The group is seeking to trim output levels.

Economic data out in the Asian session from Japan showed both imports and exports shrank by more than expected in October. Japan reported a trade surplus of 496.2 billion yen in October, just below September’s 498.3 billion yen figure and missed forecasts for a 615.4 yen surplus.

This week started off quietly in terms of economic data. Wednesday is looking a bit busier with manufacturing and services PMIs from the Eurozone and durable goods orders from the US. The Fed minutes out on Wednesday will also be interesting to watch as they may offer more insight into the Fed’s rate hike path.