FX market outlook

FX market outlook

Dollar hits 9-month high against yen, oil continues to gain after OPEC deal.

Risk sentiment in today’s Asian session was boosted by data showing a pickup in China’s manufacturing activity. Today’s risk appetite follows from a surge in crude oil prices after the Organization of the Petroleum Exporting Countries (OPEC) reached a deal yesterday to cut output.

Oil prices were still in focus as they extended gains today to reach a 5-week high. Brent crude rose to $52.70 a barrel, the highest since October 25. WTI oil climbed to $50.20 a barrel. A global supply glut has kept oil prices depressed for the last two years and so yesterday’s agreement by OPEC to cut oil production levels for the first time in eight years pushed oil prices higher. The cartel reached a deal for a cut of 1.2 million barrels a day starting from January.

The rise in oil prices stoked inflation expectations, which in turn sent US Treasury yields higher and lifted the dollar. The greenback rose to a 9-month high against the yen to hit 114.82 yen in early Asian trading today. But the rally lost steam later in the session as USDJPY slid to 113.82 yen.

The euro rose to 121.54 yen, its highest level since June 24 before reversing to 120.83 yen. Against the dollar, the euro edged up to $1.0628. The single currency’s gains might be capped though ahead of Italy’s referendum on Sunday.

The Australian dollar rose after data out of China, which is Australia’s major trading partner. AUDUSD climbed from a session low of $0.7375 to a high of $0.7419.

China’s official manufacturing PMI rose to 51.7 in November, giving evidence of stabilization in the world’s second-largest economy. The index beat estimates of 51.0, as well as the 51.2 print for October. However, a  private survey by Caixin showed China’s manufacturing PMI came in at 50.9, down from 51.2 in October but the index is still in expansionary territory above 50.

Other PMI data were released by Japan which signaled a solid improvement in manufacturing conditions in the economy. The final headline PMI came in at 51.3 in November, only a slight deviation from October’s 51.4, which was the highest reading since January.

Other PMI data are due to be released today from the Eurozone, the UK and the US.