FX market outlook

FX market outlook

Dollar slides while stocks climb; jobless claims and IP gathering attention in the US

Here are the latest developments in global markets:

• FOREX: The dollar index fell 0.4% on Thursday, extending the significant losses it posted on Wednesday in the aftermath of the US CPI and retail sales data.
• STOCKS: US markets finished the day notably higher yesterday, erasing earlier losses, despite the stronger-than-anticipated US inflation prints for January. The Nasdaq Composite led the charge, gaining almost 1.9%, while the S&P 500 followed in its tracks, closing 1.3% higher. The Dow Jones climbed 1.0%. Moreover, futures tracking the Dow, S&P, and Nasdaq 100, are all in positive territory, suggesting these indices could open higher today. The positive sentiment spilled over into Asian trading as well. In Japan, the Nikkei 225 rose 1.5% while the Topix climbed by 1.0%, both indices recovering some of their latest losses even despite the surge in the yen, which typically weighs on Japanese equities. In Hong Kong, the Hang Seng added 2.0% in shortened trading ahead of the Lunar New Year holidays, while in Europe, futures tracking all of the major indices are in the green as well.
• COMMODITIES: Oil prices surged today, with WTI and Brent crude being up 1.4% and 0.8% respectively, both benchmarks adding to the massive gains they posted yesterday on the back of a weaker dollar, the recovery in risk sentiment, and a smaller-than-anticipated build in US inventories. Some comments from the Saudi Energy Minister Khalid al-Falih probably helped as well. He noted that his nation is willing to stick to the OPEC and non-OPEC supply cuts throughout 2018, even if the market rebalances itself in the meantime, alleviating some fears of over-supply amid recent reports that US production continues to soar. In precious metals, gold was 0.2% higher today, after skyrocketing yesterday in the aftermath of the US data to break above the $1350/ounce barrier, currently trading near $1354. Technically, the $1366 level will be key to watch, as a potential upside break of that area would mark a forthcoming higher high on the daily chart.

Major movers: Dollar tanks while US stocks close higher, even despite CPI beat

To say that markets moved sharply after the US data releases yesterday is an understatement. In terms of inflation, both the headline and the core CPI rates remained unchanged at 2.1% and 1.8% respectively in yearly terms, beating their forecasts for modest declines. However, retail sales disappointed notably, with the headline rate dropping instead of rising as anticipated, while last month’s prints were also revised lower.

The market response was fierce. Initially, the knee-jerk reaction was a stronger dollar as the yields on 10-year Treasury bills surged to reach 4-year highs. The opposite was true for US equity indices, which dropped on speculation that the Fed may raise rates more aggressively due to robust inflation, and the prospect of softer corporate earnings amid signs that consumption may be waning.

However, this all reversed within the following minutes. The dollar quickly gave back all its gains to trade much lower against its major counterparts, while US stocks recovered to finish the day even higher. There was no clear catalyst for the reversal. A plausible explanation is that despite the signs of strong inflation, the FOMC may not pick up the pace of normalization, amid signs of slowing consumption in the economy. Indeed, in the aftermath of the data, the Atlanta Fed GDPNow model revised down its GDP forecast for the first quarter to 3.2%, from 4.0% previously. Some large option expiries at that time (especially in euro/dollar) may have helped to initiate the reversal in the dollar, and once it was underway, the break of some key technical levels likely aided as well.

Overall, the reaction to this data set confirms that despite some consolidation in recent days, the negative sentiment surrounding the dollar remains in full force, amid concerns over rising budget deficits and the sustainability of the US debt trajectory, among others. Judging by yesterday’s moves, dollar/yen appears to be a good proxy for further dollar weakness. Besides the dollar tanking, the yen is enjoying safe haven inflows amid all of this havoc, causing the pair to break below key technical barriers. Moreover, Japanese officials do not appear to be particularly worried with the currency’s appreciation, so far at least, with Finance Minister Taro Aso noting overnight that the yen’s strength is not abrupt enough to warrant intervention. Another key pair to watch is euro/dollar, which is now hovering very close to its recent highs around 1.2530. Should the bulls manage to overcome that barrier, it would be a bullish signal that carry larger upside extensions.

Day ahead: US initial jobless claims & industrial production on the agenda

The US will be on the receiving end of relatively important data during Thursday’s trading. Initial and continued jobless claims for the week ending February 10 will be made public at 1330 GMT. First-time benefit claimants are expected to stand at 230k, this being higher by 9k relative to the week that preceded, though yet again below the 300k threshold that’s linked to a healthy labor market. Other data released at the same time include February’s New York Fed manufacturing survey and the Philly Fed business index for the same month, as well as data on producer prices for the month of January.

US industrial production data for January are also of significance. Those are scheduled for release at 1415 GMT. Industrial production is expected to ease, growing by 0.2% on a monthly basis, after beating expectations in December to expand by 0.9% m/m. Manufacturing output, a subset of industrial output, will also be watched, while figures on capacity utilization are also due at the same time. Lastly, February’s National Association of Home Builders Housing Market index will be made public at 1500 GMT.

Out of Canada, the ADP’s nonfarm employment change due at 1330 GMT might attract some interest.

ECB executive board member and chief economist Peter Praet will be participating in a discussion at a conference organized by the French Treasury and the IMF at 1045 GMT. Sabine Lautenschlager, herself an ECB board member, is scheduled to give a speech at Dutch Banking Day 2018 at 1200 GMT. Norway’s central bank governor, Oeystein Olsen, will be giving a keynote speech at 1700 GMT. Lastly, Bank of Canada Deputy Governor Lawrence Schembri will be talking at 1830 GMT.

In equities, companies releasing quarterly results will be attracting attention.