FX market outlook

FX market outlook

Dollar sinks to 3-year low; UK retail sales eyed

Here are the latest developments in global markets:

• FOREX: The dollar index traded almost 0.3% lower on Friday, adding to the losses it posted yesterday and recording a new three-year low. The continued slide in the world’s reverse currency managed to push euro/dollar to 1.2555 overnight, marking a fresh high last seen in 2014 for the pair. Meanwhile, dollar/yen posted a new 15-month low.
• STOCKS: US equity indices continued to recover yesterday, amplifying expectations that the recent turbulence may be gradually fading. The Nasdaq Composite led the way, climbing by 1.6%, while the S&P 500 and the Dow Jones both rose by 1.2%. Futures tracking the Dow, S&P, and Nasdaq 100 are all in positive territory at the time of writing, albeit marginally so. This positive sentiment rolled into Japanese trading as well, with the Nikkei 225 and the Topix indices gaining 1.2% and 1.1% respectively. Markets in mainland China and Hong Kong are closed in celebration of the Lunar New Year. Over in Europe, futures tracking all of the major stock indices are safely in the green.
• COMMODITIES: Oil prices traded a little higher on Friday, with WTI and Brent crude gaining 0.2% and 0.3% respectively. With little in the way of energy news, the liquid’s gains may be owed to the continued weakness in the US dollar, as well as the sustained recovery in risk sentiment, which is supporting energy stocks and by extent, oil prices themselves. Despite the recent rebound though, one must sound a note of caution, as the fundamentals of the oil market seem to be deteriorating rather quickly. US production is already at all-time highs and seems to be rising still, a factor that could keep a lid on any near-term gains in oil. In precious metals, dollar-denominated gold is nearly 0.4% higher today, last seen near the $1360/ounce mark. The $1366 resistance zone is worth keeping an eye on. If buyers manage to overcome it, that would mark a fresh high on the daily chart, and it could be a signal for further advances.

Major movers: The dollar’s slide continues; Kuroda secures another term as BoJ Governor  

The US dollar continued to bleed on Thursday, extending its losses during the Asian trading session Friday, even though the yields on 10-year US Treasuries touched a fresh four-year high yesterday. The inability of the greenback to draw any support from the bond market in recent days is quite perplexing, and likely reflects the fact that yields may be rising for the “wrong reasons”.

Namely, instead of the surge in yields being driven by expectations that a healthy US economy will lead the Fed to raise rates more aggressively, it may be largely owed to investors reducing their exposure to Treasuries amid concerns that widening US deficits will make the nation’s debt trajectory even more unsustainable. Indeed, today’s release of flow data from the Japanese Ministry of Finance adds credibility to this argument, as it confirmed that Japanese investors continued to sell off foreign bonds in the week ended February 9. The repatriation of these funds in light of the Japanese fiscal year ending soon may also be one of the major factors behind the yen’s recent gains.

Speaking of the yen, it gained nearly 0.3% against the dollar today to briefly touch the 105.50 area, a fresh 15-month low for dollar/yen, even despite relatively dovish news coming out of Japan. Haruhiko Kuroda has been reappointed for another term as Bank of Japan (BoJ) Governor, while the government also nominated another two deputy Governors to join the BoJ, both of which are seen as policy doves. This suggests that the Bank is very likely to keep its ultra-loose policy framework in place for a while longer, which in isolation, is a negative development for the yen. Nonetheless, in an environment where Japanese funds are repatriating money and the currency may enjoy increased inflows due to its safe-haven status amid this equity turbulence, this may not matter all too much in the near-term.

Day ahead: UK retail sales, US housing data and University of Michigan consumer sentiment survey among Friday’s releases

Dominating attention during morning European trading hours (at 0930 GMT) will UK retail sales for the month of January. Both retail and core retails sales (that exclude fuel for automotives) are projected to rebound on a monthly basis following December’s contraction. In 2017, UK retailers experienced their worst year since 2013 as inflation outstripping wage growth – translating into weaker purchasing power for households – weighed on consumer spending and consequently on retail sales. Should the readings move convincingly towards offsetting weakness from the past, then market participants are likely to interpret them as yet another factor supporting the case for a Bank of England rate hike being delivered sooner rather than later, pushing sterling higher versus other currencies.

US housing data due at 1330 GMT are also of importance. Housing starts were affected by cold weather conditions in December, recording their sharpest monthly fall in around a year. January’s print is interesting to watch as the extreme weather effects are dropping out of the data. Building permits and import prices for January will be made public at the same time.

Another release attracting interest in the US is the University of Michigan’s preliminary survey on consumer sentiment for the month of February. Not much of a change in consumer sentiment is expected relative to January. The survey will be made public at 1500 GMT.

Canadian manufacturing sales for the month of December due at 1330 GMT will be gathering loonie traders’ attention.

In politics, US Secretary of State Rex Tillerson will be meeting Turkish Foreign Minister Mevlüt Çavuşoğlu. The meeting could be interesting given the rising tensions between the two countries. Also of interest – amid Brexit negotiations – might be a meeting between UK PM Theresa May and German Chancellor Angela Merkel in Berlin.

Oil traders will be paying attention to the US Baker Hughes oil rig count due at 1800 GMT.

The earnings season remains in full swing, with Coca-Cola being among companies releasing quarterly results in the US.