FX market outlook

FX market outlook

Posted on Tuesday, January 23 2018 at 10:09 am GMT+0000

Yen whipsaws after BoJ and aussie tumbles on trade risk as world leaders gather in Davos

Here are the latest developments in global markets:

  • FOREX: The US dollar index traded slightly higher on Tuesday, in the aftermath of Congress voting for a temporary funding bill, thereby ending the US government’s partial shutdown.
  • STOCKS: Equities were in the green across the board. Japanese markets skyrocketed, with the Nikkei 225 and the Topix closing higher by 1.3% and 1.0% respectively; both indices reached fresh 27-year highs. In Hong Kong, the Hang Seng surged by 1.35%, breaking another all-time high, seemingly unfazed by increasing trade tensions between the US and China. In Europe, futures tracking the Euro Stoxx 50 are up 0.5%. Last but not least, the equity winning streak in the US continued unabated, with the Dow Jones, S&P 500 and Nasdaq Composite all closing at record highs once more. Futures tracking the Dow, S&P and Nasdaq 100 are all currently in positive territory as well.
  • COMMODITIES: Oil prices traded higher, with WTI and Brent crude being up 0.6% and 0.5% respectively. Although there is no clear fundamental catalyst behind the moves, the advances are being attributed to signs that healthy global economic growth could strengthen demand for the precious liquid. In precious metals, gold was higher by nearly 0.3%, last trading near $1336 per ounce.

Major movers: Yen whipsaws after BoJ; aussie tumbles on rising trade tensions

The Japanese yen whipsawed on Tuesday, in the aftermath of the Bank of Japan’s (BoJ) policy decision. The BoJ kept its policy framework unchanged as was widely expected, while it upgraded its language around inflation expectations, which it now describes as “more or less unchanged” from “weakening” previously. This triggered a modest surge in the JPY, though the advance was short-lived, with the currency giving back all its gains to trade even lower against its major counterparts after Governor Kuroda stepped up to the rostrum.

The Governor sought to reassure investors that there is no need to adjust the Bank’s policy framework simply due to a rise in inflation expectations, as actual inflation remains far away from its target. Moreover, he poured cold water on expectations that the Bank is moving towards the stimulus-exit door, noting that changes to day-to-day bond buying operations do not indicate the future course of monetary policy. Overall, the key message from the BoJ was that Japan’s economy is gradually improving, but with inflation still so low, it is far too soon for markets to be speculating whether the Bank will scale back its massive stimulus program.

In the US, the government’s partial shutdown ended yesterday after Congress voted in favor of a temporary funding bill that will keep public services running until the 8th of February.

The British pound surged on Monday, with sterling/dollar briefly touching the 1.4000 mark before pulling back, with no major piece of news behind the advance. Market chatter suggests that sterling’s recent gains are being driven by a repricing of the Brexit risk premium, amid signs that the negotiations are slowly but surely moving forward, and that the two sides may soon agree on a transitional Brexit deal.

Elsewhere, aussie/dollar plunged overnight, weighed on by signs of increased protectionism in the US, after President Trump approved tariffs on imported solar cells and certain washing machines. This prompted China to reply in strong rhetoric, condemning the US action. The risk of further escalation in trade tensions between the world’s two largest economies appears to be high, and should China decide to reply in similar fashion, then the AUD could extend its losses. Given Australia’s heavy trade exposure to China, anything that could harm the Chinese economy is considered as a negative for the Australian dollar, which is seen as a liquid proxy for “China plays”.

Day ahead: Business surveys, politics and corporate earnings on the horizon

The ZEW research institute’s surveys that gauge economic sentiment and current conditions in Germany, the eurozone’s as well as Europe’s largest economy, are scheduled for release at 1000 GMT. Both surveys are anticipated to reflect an improvement relative to December, with the reading on current conditions forecast to rise to its highest since 2011.

Remaining within Germany and turning to politics, there were some reports suggesting that talks to form a government between Chancellor Merkel’s conservative bloc and the Social Democrats will commence today.

The Confederation of British Industry’s survey on factory orders is expected to reflect a reduction in January after matching November’s three-decade high in December. The relevant figure is due at 1100 GMT.

Eurozone flash consumer confidence for the month of January will be made public at 1500 GMT. The reading – released by the European Commission’s Directorate General for Economic and Financial Affairs – is expected to come in in positive territory for the third straight month, as well as reflect an improvement for the sixth month in a row.

The US Senate Banking Committee will be holding a hearing on the nomination of Marvin Goodfriend as a member of the Federal Reserve Board of Governors at 1500 GMT.

The World Economic Forum in Davos, Switzerland is underway. Policymakers from around the world will be attending, with US President Donald Trump also likely to join although it is still not certain due to the government shutdown complications that took place in the US.

Weekly API data including information on crude inventories are due at 2135 GMT.

The earnings season continues with Johnson & Johnson, Procter & Gamble and Verizon being among the big names releasing quarterly results on Tuesday; all three will be reporting before the US market open.