FX market outlook

FX market outlook

Posted on Tuesday, April 10 2018 at 8:57 am GMT+0000

Risk sentiment boosted by Xi’s speech; US PPI due

Here are the latest developments in global markets:

  • FOREX: The US dollar index, which tracks the greenback’s performance against a basket of six major currencies, was practically unchanged on Tuesday. Against the yen, the dollar was nearly 0.4% higher though, after some comments from Chinese President Xi Jinping boosted risk appetite, curbing demand for the safe-haven Japanese currency.
  • STOCKS: US markets managed to close higher on Monday, but importantly, the major benchmarks gave back most of their earlier gains a few hours before Wall Street closed, following a report that the FBI had raided the offices of President Trump’s lawyer. The Nasdaq Composite rose by 0.5%, while the S&P 500 and the Dow Jones advanced by 0.3% and 0.2% respectively. That said, futures tracking the Dow, S&P, and Nasdaq 100 are pointing to a much higher open today, most likely to due to some constructive remarks by Chinese President Xi Jinping earlier. This optimistic sentiment was evident in Asian trading today. In Japan, the Nikkei 225 and the Topix gained 0.54% and 0.35% correspondingly, while in Hong Kong, the Hang Seng climbed by 1.8%. In Europe, futures tracking the major benchmarks were flashing green as well.
  • COMMODITIES: Oil prices rallied on the back of the broader risk-on environment. WTI and Brent crude are both 1.4% higher today, extending significant gains from yesterday, amid speculation that Sino-American trade tensions are set to subside moving forward. Later today, oil traders will turn their sights to the weekly API crude inventory data at 2030 GMT, which will provide a fresh indication regarding the state of US production. In precious metals, gold prices fell 0.2% as trade fears moderated, diminishing the appeal of the safe-haven metal.

Major movers: Risk appetite recovers after Xi Jinping avoids trade provocations

Overnight, a speech by Chinese President Xi Jinping calmed the nerves of investors regarding any further escalation in the US-China trade spat. Speaking at the Boao Forum for Asia, Xi pledged to open up China’s economy further, to lower import tariffs, and to strengthen intellectual property protection. Perhaps most importantly, he avoided any provocative comments about trade and protectionism, all of which helped risk sentiment to recover as the probability of a full-blown trade war was seen as declining.

The trade-sensitive antipodean currencies rallied on the back of these remarks, with aussie/dollar and kiwi/dollar both rising by more than 0.4%. Meanwhile, safe haven assets such as the yen and gold retreated. Dollar/yen and euro/yen rose by 0.4% and 0.35% respectively. Meanwhile, stocks in Asia surged, while US equity futures jumped as well.

US stocks surrendered most of their early gains on Monday, with the S&P 500 closing just 0.3% higher, after advancing nearly 2.0% earlier in the session. The catalyst for the pullback were reports that federal agents had raided the offices of President Trump’s lawyer, Michael Cohen. The raid brought political concerns back to the surface, by reminding investors that the Mueller investigation is still ongoing and that numerous risks besides a trade war still loom.

The euro surged yesterday on the back of some optimistic remarks by ECB President Mario Draghi. The ECB chief noted that despite some weakness in recent economic surveys, the Bank expects the pace of economic expansion to remain strong in 2018. The implicit message was that the recent loss of momentum in the economy is unlikely to derail the ECB’s tightening plans, unless of course the slowdown intensifies much further.

Day ahead: US producer prices on the agenda

US producer prices for the month of March due out at 1230 GMT will probably generate most attention out of Tuesday’s economic calendar, before attention turning tomorrow to another gauge of inflationary pressures, namely to consumer prices for the same month. Wholesale inventory data for February are also on the agenda on Tuesday out of the world’s largest economy, scheduled for release at 1400 GMT.

At the same time as US PPI figures (1230 GMT), Canada will see the release of building permits data for February, while a little earlier (1215 GMT) the print on housing starts for the month of March will be made public.

In oil markets, API data on crude stocks are due at 2030 GMT.

Any developments on global trade can spur positioning in equity markets; it remains to be seen whether positive sentiment will be maintained following the soothing remarks by Chinese President Xi Jinping. Also of interest will be Facebook CEO Mark Zuckerberg’s testimony before Congress on Tuesday and Wednesday in relation to data privacy leaks.

In politics, the fresh turn in Special Counsel Robert Mueller’s investigation of Russian meddling in 2016’s US presidential election might attract some attention.

Policymakers making appearances include Dallas Fed President Robert Kaplan (non-voter), Bank of England Chief Economist Andy Haldane and European Central Bank policymaker Ewald Nowotny. The former two are scheduled to speak at 0830 GMT, while no specific time was released for the latter whose comments might be of most interest given that he will be talking about the ECB’s plans to end its massive stimulus program this year.