FX market outlook

FX market outlook

Rising yields bolster the dollar; eurozone flash PMIs in focus

Here are the latest developments in global markets:

• FOREX: The US dollar index traded higher on Monday, though by less than 0.1%, adding to the significant gains it posted on Friday on the back of rising US Treasury yields. The loonie plunged on Friday after Canada’s CPI data disappointed, while the safe-haven Japanese yen is a touch softer today, amid diminishing risks on the North Korean front.
• STOCKS: US markets closed lower on Friday, weighed on by a sustained rise in longer-term US bond yields. Rising bond yields typically weigh on demand for stocks, which become less attractive to hold in an environment where bonds begin to offer a higher and “safer” return. The Nasdaq Composite led the way down, declining by 1.27%, while the S&P 500 and Dow Jones fell by 0.85% and 0.82% respectively. That said, futures tracking the Dow, S&P and Nasdaq 100 are currently flashing green, pointing to a higher open today. In Asia, Japan’s Nikkei 225 dropped 0.33% while the Topix was down only by 0.02%. In Hong Kong, the Hang Seng declined 0.31%. In Europe, futures tracking most major benchmarks were in positive territory, though only marginally so.
• COMMODITIES: Oil prices are slightly lower today, with WTI and Brent crude declining by 0.2% and 0.15% respectively. Despite the pullback though, both remain elevated near their respective three-and-a-half year highs. On Friday, US President Trump accused OPEC of keeping prices artificially elevated, while the Baker Hughes oil rig count showed another marked increase in active US rigs, both of which likely tempered the bullish sentiment surrounding the oil market. In precious metals, gold is trading marginally lower today, extending the significant losses it posted on Friday as the US dollar surged. Since gold is denominated in dollars, an appreciation in the greenback makes the metal less attractive for investors using foreign currencies.

Major movers: Dollar bolstered by rising yields; loonie plunges on disappointing CPIs

The US dollar index surged on Friday, touching its highest level since April 6, buoyed by a sharp rise in longer-term US bond yields. The yield on 10-year US Treasuries touched 2.979% on Monday, a fresh high last seen in 2014, helping to increase the appeal of the greenback.

Besides lingering concerns about US deficits, the recent spike in yields appears to be owed to rising oil prices fueling speculation for higher inflation down the road, as well as trade and geopolitical risks subsiding. In terms of geopolitics, North Korea pledged over the weekend to immediately suspend its nuclear and missiles tests. As for trade, US Treasury Secretary Steven Mnuchin said on Saturday he is considering visiting China for trade negotiations, amplifying speculation that the recent tensions may be resolved through talks, instead of escalating into anything bigger.

The yen started the week on a soft footing, trading 0.15% lower against the dollar and almost 0.1% down versus the euro. The fact that trade and geopolitical risks seem to be fading is diminishing demand for the Japanese currency, which is viewed as a safe-haven asset.

Elsewhere, the loonie plunged on Friday, extending its recent losses. The move came after Canada’s inflation data for March disappointed, diminishing expectations for an imminent rate hike by the Bank of Canada (BoC). BoC Governor Poloz reinforced this narrative over the weekend, indicating he is not worried about inflation being above 2%. He said the Bank has a 1-3% inflation target range, and that a temporary overshoot above 2% does not automatically imply a rate hike. While the BoC appears unlikely to hike in May given the cautious stance it has maintained lately, investors still seem convinced a hike will materialize in July, with the implied probability for such action resting at 76%.

Day ahead: Eurozone PMIs and US existing home sales on the agenda

Monday’s economic calendar features a few releases that have the capacity to lead to movements in forex markets. Perhaps most notable of those releases are the eurozone’s flash PMI readings for the month of April, especially in light of the fact that they come only a few days ahead of a European Central Bank meeting.

Eurozone preliminary PMI estimates for the manufacturing and services sectors, as well as the composite measure that blends the two industries, will be made public at 0800 GMT. Projections are for April’s figures to remain above the 50 contraction/expansion territory, though point to further easing of activity after an upbeat start of the year. Such an outcome would support views that economic activity has peaked in the euro area and likely complicate the ECB’s “task” to normalize policy; the Bank is holding a meeting later this week, with a decision on monetary policy scheduled to be made public on Thursday.

The corresponding PMI prints for Germany and France, the eurozone’s two largest economies, are also due today ahead of euro-wide numbers. Germany’s numbers will hit the markets at 0730 GMT, while France’s were released at 0700 GMT (the manufacturing print was marginally below expectations, while the one on services positively surprised; the euro gained as a result).

Turning to North America, Canada will see the release of data on February’s wholesale trade at 1230 GMT, with the focus next turning to the US. Markit’s flash manufacturing PMI for April and figures on March existing home sales will be made public out of the world’s largest economy at 1345 GMT and 1400 GMT respectively. Manufacturing activity is anticipated to cool a bit though still remain in growth territory, and existing home sales are expected to marginally expand relative to February, a month during which they surged –supply-side issues are yet again likely to have affected home sales.

Google parent Alphabet and Halliburton will be releasing quarterly results today; the former after the US market close and the latter before the market’s open.

An appearance before the House of Commons Standing Committee on Finance by Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins at 1930 GMT might be of interest for loonie traders, while ECB Board member Benoit Coeure will be participating in a conference at 1400 GMT.