FX market outlook

FX market outlook

Dollar breaks above 113 yen as Fed minutes intensify rate hike expectations.

The US dollar was once again making fresh highs in Thursday’s Asian session as strong US data and hawkish FOMC minutes fuelled expectations that the Fed is poised to raise rates in December. Wall Street also extended its rally with the Dow Jones and S&P 500 closing at another record high on Wednesday as investors bet that the incoming Trump administration will boost fiscal spending. However, stocks in Asia were mixed today as rising US treasury yields continued to weigh on sentiment on fears of a capital outflow from emerging market assets.

Much stronger-than-expected durable goods data out of the United States yesterday drove the US currency above 112 yen for the first time since April. Minutes of the Fed’s November policy meeting released later in the day added to the bullish momentum and the pair broke above the 113 level in late Asian trading today, hitting an 8-month of 113.53 yen. The FOMC minutes confirmed expectations that the Fed is readying to increase rates in December. The minutes said “most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon”.

The resumption of the dollar rally pushed commodity currencies into reverse, with the Canadian, Australian and New Zealand dollars dropping to near multi-month lows versus the greenback. The kiwi hit a fresh 4-month low of 0.6971 and the loonie was down 0.3% in Asian trading at 1.3523 per US dollar. The Australian dollar did not fall as much however, as it was supported by higher metal prices. The aussie was last trading around 0.7370 against the greenback.

There was little data out of Asia on Thursday apart from manufacturing PMI out of Japan. The flash estimate of the Nikkei manufacturing PMI eased slightly from 51.4 to 51.1 in November, indicating Japan’s manufacturing sector expanded for a third straight month.

In European currencies, the euro made another 11-month low, hitting 1.0517 dollars, as diverging monetary policies between the Eurozone and the US continue to weigh on the single currency. The pound was more resilient though against the dollar and managed to hold above the 1.24 level. Sterling was supported by yesterday’s Autumn Budget Statement by the UK’s finance minister, which included measures to boost long-term growth while the British economy transitions to a post-Brexit environment.

In commodities, oil prices were steadier, having come under pressure yesterday on reports that some OPEC members were not happy about not being exempt from a production cut. However, Iraq’s Prime Minister today said his country will participate in the output cut. This helped WTI oil stabilize around $48 a barrel in Asian trading today.

Gold meanwhile was stuck near 11-month lows at around $1823 an ounce as investors diverted funds away from safe-haven assets.

Looking ahead to the rest of the day, it is looking relatively quiet due to the Thanksgiving holiday in the United States. The only major data due is the Ifo business survey out of Germany.