FX market outlook

FX market outlook

Posted on Thursday, March 29 2018 at 8:41 am GMT+0000

Dollar stages comeback as yen crumbles; US core PCE index eyed

Here are the latest developments in global markets:

FOREX: The dollar index declined 0.1% today, giving back some of the significant gains it posted yesterday, when it recorded its biggest daily surge in six months. Meanwhile, the yen was losing ground as geopolitical tensions appeared to ease further, and amid increased flows in light of the Japanese fiscal year ending tomorrow.

STOCKS: US markets closed lower again, though the magnitude of the declines was much smaller compared to recent days. The tech-heavy Nasdaq Composite led the charge down, shedding 0.85% of its value, dragged by the likes of Tesla (-7.67%), Netflix (-4.96%) and Amazon (-4.38%). The S&P 500 fell by 0.3%, while the Dow Jones was only 0.04% lower. Futures tracking the Dow, S&P, and Nasdaq 100 are all flashing green currently, pointing to a higher open today. Asia was a different story, with Japan’s Nikkei 225 and Topix rising by 0.6% and 0.26% respectively, while Hong Kong’s Hang Seng gained 0.7%. In Europe, futures tracking all the major benchmarks are signaling these indices could open higher today.

COMMODITIES: In energy markets, WTI crude and Brent gained 0.5% and 0.6% respectively, both recouping the losses they posted yesterday after the EIA data surprisingly showed a build in stockpiles, instead of a small drawdown that was expected. News yesterday that more OPEC producers are willing to extend the production cuts into 2019 likely boosted overall sentiment in oil markets. In precious metals, gold is marginally higher today, after having declined significantly in the previous session. The yellow metal’s underperformance is probably owed to a combination of a stronger US dollar, as well as a reduction in geopolitical risks that likely hurt demand for the safe haven.
Major movers: Dollar surges, yen crumbles as geopolitical risk premium declines

The US dollar index rose by more than 1.4% yesterday, without any clear fundamental catalyst behind the surge. That said, it is not unusual for such moves to occur before the end of the month – and in this case the quarter too – as fund managers rebalance their portfolios and cover some of their prior short-dollar positions. An upward revision in the final estimate of US GDP for Q4 may have helped the move as well.

The dollar index is 0.1% lower today, currently trading near the 89.95 level, after having touched 90.14 yesterday. Euro/dollar was 0.1% higher, recovering part of its recent losses, while sterling/dollar was practically flat, last seen near 1.4080.

Elsewhere, the yen lost ground yesterday. The move was likely aided by signs of progress on the geopolitical front – with JPY being a safe haven asset, it tends to gain when uncertainties are high, but tumble when tensions decline. Following headlines that North Korea is considering denuclearization, risk sentiment was boosted further by news the regime will seek diplomatic talks with Japan. This likely enhanced speculation for a prudent and peaceful resolution to tensions, diverting flows out of safe assets like the yen and gold. Yen traders should remain vigilant though, as the Japanese fiscal year ends tomorrow. This suggests the currency could continue to experience heightened volatility, as some investors repatriate cash, and as others place fresh bets for the new financial year.

Dollar/loonie is marginally lower today, after US Trade Representative Robert Lighthizer said yesterday he is “hopeful” of reaching a NAFTA deal soon. The next round of talks is tentatively scheduled for mid-April, and all sides appear to be seeking a breakthrough before the Mexican elections in July. Thus, optimistic headlines on the subject that boost the CAD and MXN are not to be ruled out over the next weeks. The antipodeans were mixed, with aussie/dollar gaining 0.2%, but still trading near a 3-month low, while kiwi/dollar declined 0.1%.

Day ahead: Focus on US core PCE index, personal income & personal spending; Canada delivers GDP growth figures

Friday will be a busy day in terms of economic releases ahead of a long Easter-holiday weekend starting tomorrow, with the US, UK, Canada, and Germany being among the countries to deliver data.

At 0830 GMT, the Office for National Statistics in the UK will deliver its final GDP growth readings for the fourth-quarter of 2017, with analysts predicting an expansion rate of 0.4% month-on-month and 1.4% year-on-year as was previously estimated. The data are less likely to move the pound – unless there is a large deviation from forecasts – as investors are looking forward to first Q1 2018 growth estimates.

Staying in Europe, investors will also keep a close eye on German preliminary inflation estimates due at 1200 GMT. Particularly, consumer prices in the largest EU economy are anticipated to come in stronger at 1.7% y/y in March after falling the past two months. In February the measure stood at 1.4% y/y.

Canada will also report on GDP growth today at 1230 GMT and unlike the UK figures, these are expected to have an impact on the loonie in the wake of positive or negative surprises since Statistics Canada does not provide early estimates. According to forecasts, the Canadian economy is expected to have grown at December’s pace of 0.1% m/m, probably recording a yearly expansion of 2.9%.

In the US, the Fed’s favorite inflation measure, the core Personal Consumption Expenditure index (PCE), and data on personal spending and personal income due at 1230 GMT will probably be of greater interest as markets are highly expecting the Fed to raise interest rates two more times this year and an unexpected increase in the numbers could be an indication that monetary policy is in the right direction. For now, forecasts are for the PCE index to inch up by 0.1 percentage points to 1.6% y/y in February, while personal income and personal spending are seen steady at 0.4% m/m and 0.2% m/m respectively. Encouraging outcomes could lift the dollar but any negative headlines regarding Trump’s trade policy could erase potential gains.

In other data out of the US, initial jobless claims, the Chicago PMI and Michigan’s consumer sentiment will be in focus as well.

In energy markets, Baker Hughes will issue its weekly report on active US oil drillings for the week ending March 23 at 1700 GMT. Note that both the API and EIA weekly stats showed an unexpected rise in crude oil inventories, therefore it would be interesting to see whether the pressure in oil prices will continue to persist if Baker Hughes backs a rise in US oil production.

Regarding today’s public appearances, the Philadelphia Fed President Patrick Harker, a non-voting member, is scheduled to speak on the economic outlook before a New York Association of Business Economics luncheon at 1700 GMT.