FX market outlook

FX market outlook

Dollar little changed; US equities rebound but is the turmoil over?

Here are the latest developments in global markets:

• FOREX: The dollar index was marginally lower on Wednesday, experiencing little movement in the session, as investors’ attention remained fixed on movements in stock markets.
• STOCKS: US equity indices rebounded yesterday, temporarily alleviating some concerns that the sell-off seen earlier in the week would develop into something much bigger. The Dow Jones led the way, gaining an extraordinary 2.3%, while the Nasdaq Composite followed in its tracks, up by 2.1%. The S&P 500 rose 1.7%; the Dow and S&P experienced their best daily performance since January 2016 and November 2016 respectively, while the Nasdaq Composite climbed the most since October of last year. However, futures tracking the Dow, S&P and Nasdaq 100 are all currently in negative territory, suggesting that the recent volatility in stocks may not be over just yet. Japanese markets recovered today as well, but to a much smaller degree. The Nikkei 225 closed higher by only 0.2%, while the Topix gained 0.4%. The underperformance of Japanese indices may be owed to the recent safe-haven gains in the yen, as a stronger Japanese currency typically weighs on the profits of Japanese exporting firms. Turning to Europe, futures tracking the Euro STOXX 50 are currently up 1.2%, signaling that the rebound in the US may roll over into European trading too.
• COMMODITIES: Oil prices recovered as well, with WTI and Brent crude being up 0.9% and 0.8% respectively. The modest rebound in oil prices was helped by the private API inventory data released overnight, which showed a drawdown in US stockpiles. Today, investors will turn their eyes to the official EIA inventory data – due at 1530 GMT. It will be interesting to see whether the recent surge in US oil rigs has started to translate into higher production. In precious metals, gold was up nearly 0.5%, as the broader market volatility heightened demand for the safe-haven asset.

Major movers: US stocks rebound; kiwi jumps ahead of RBNZ decision  

Investors remained focused on US equity markets yesterday. After a very volatile session, the major US indices managed to assume a direction and close the day notably higher, recovering some of the losses they posted on Monday. Despite this rebound though, the turmoil may not be over yet, as futures tracking the major US indices are flashing red today.

Nonetheless, the fact that US markets closed positive yesterday is another factor reinforcing the argument that the recent tumble appears to be merely a correction following years of robust gains, and not the beginning of a bear market. Nothing major has changed fundamentally, with economic data and surveys confirming that the major economies are still on a very strong footing.

Kiwi/dollar jumped overnight, following the release of New Zealand’s employment report for the fourth quarter, which was stronger than expected overall. Even though wages rose at the same pace as previously, the unemployment rate surprisingly fell, while the labor force participation rate rose by more than anticipated, showing that the nation’s labor market continues to tighten at a rapid pace.

Despite the initial positive reaction in kiwi/dollar, the pair did not manage to maintain its upward momentum and gave back most of its gains in the following hours. A potential explanation for the pullback may be investors’ jitters ahead of the RBNZ policy decision later today, at 2000 GMT. Although the Bank is likely to maintain a relatively neutral tone on policy amid mixed economic data (disappointing inflation, but strong labor market), it could toughen its language around the NZD, which has surged since the last meeting. Thus, investors may have opted to take some profits off the table ahead of the risk event and liquidate some of their long-NZD exposure.

Day ahead: RBNZ rate decision on horizon; German politics eyed

The economic calendar is relatively light on Wednesday, with the Reserve Bank of New Zealand’s (RBNZ) interest rate decision attracting attention later in the day, while any developments on the German political front could also lead to investor positioning.

At 0830 GMT, the Halifax House Price Index for the month of January is due out of the UK. The measure is expected to show an increase in prices by 0.2% on a monthly basis after December’s decline by 0.6%.

Out of North America, Canada will see the release of figures on December’s building permits at 1330 GMT, while US consumer credit data for the month of December are scheduled for release at 2000 GMT.

The RBNZ’s rate decision is due at 2000 GMT. No change in policy is expected, with the official cash rate remaining unchanged at the record low of 1.75%. It would be interesting to see if policymakers attempt to talk down the currency following its recent gains.

In politics, discussions continue between German Chancellor Angela Merkel’s conservative bloc and the Social Democrats in an effort to strike a deal, forming a government and reviving their “grand coalition”.

In terms of policymakers’ appearances: ECB board member Sabine Lautenschlager and bank supervisory chief Daniele Nouy will be holding a news conference at 0900 GMT. Fed Bank of Dallas President Robert Kaplan – a non-voting FOMC member in 2018 – will be participating in a Q&A session in Frankfurt at 1100 GMT. New York Fed President William Dudley will be participating in a discussion titled “Banking Culture: Still Room for Improvement?” at 1330 GMT – the New York Fed President holds a permanent voting status within the FOMC. Chicago Fed President Charles Evans – a non-voting FOMC member in 2018 – will be talking on US current economic conditions and monetary policy before the Iowa Bankers Association Bank Management Conference.

Oil prices could experience volatility when the Energy Information Administration (EIA) releases its report including information on US crude and gasoline stocks for the week ending February 2 at 1530 GMT. Crude inventories are projected to post their second straight week of rises after declining in the 10 previous weeks. Specifically, analysts anticipate an increase by 3.3 million barrels. This compares to a rise by around 6.8m barrels in the week that preceded.

In stock markets, quarterly earnings releases by corporations will continue to draw investor interest; electric vehicle-maker Tesla and Twenty-First Century Fox will be among companies releasing results on Wednesday.