FX market outlook

FX market outlook

Posted on Monday, June 25 2018 at 8:47 am GMT+0000

Risk-off mood on back of trade worries weighs on equities, boosts yen

Here are the latest developments in global markets:

  • FOREX: The dollar was slightly higher versus a basket of currencies, though it was losing ground versus the safe-haven perceived yen which attracted flows on the back of uncertainty relating to global trade. Specifically, dollar/yen was trading at two-week low levels.
  • STOCKS: Asian equities were a sea of red after the latest concerns over global trade acted to the detriment of riskier assets.
  • COMMODITIES: WTI and Brent crude were lower at $68.52 and $74.51 per barrel respectively after surging on Friday following OPEC’s agreement to a modest increase in production relative to what markets expected. In precious metals, gold, was again unable to attract safe haven flows, perhaps owed to a US currency that remains relatively elevated; gold is denominated in dollars. The yellow metal was down bu around 0.15% at $1,266.74 per ounce.

Major movers: Trade anxiety boosts the yen; commodity-currencies retreat; Turkish lira surges

The dollar index, which gauges the greenback against the currencies of six major US trading partners, edged higher, though by less than 0.2%. Still, the US currency was coming under pressure versus the yen, as safe-haven flows on the back of uncertainty over global trade elevated the Japanese currency, at one point pushing dollar/yen to 109.35, its lowest since June 11.

Also despite trading higher, it is worth pointing that at 94.52, the dollar index was at a relative distance to last week’s 11-month high of 95.53.

US President Donald Trump threatened on Friday to impose a 20% tariff on cars imported from the EU. Adding insult to injury of rising trade tensions between the US and the EU, was a report by the Wall Street Journal saying the US Treasury Department is working on blocking investments in US companies involved in “industrially significant technology” by corporations with at least 25% Chinese ownership.

Besides the fall in equities, the risk-off mood was also reflected by the falling Treasury yields; investors were seeking the safety of US government bonds.

Euro/dollar traded lower by around 0.15%, at 1.1640. Besides the trade spat with the US, other near-term drivers for the currency are expected to be Tuesday’s talks between German Chancellor Angela Merkel and the leaders of the other parties in her coalition government; immigration policy is seen as threatening her government.

Sterling was 0.2% down against the dollar ahead of an important EU summit on Brexit on June 28-29.

The commodity-linked aussie, kiwi and loonie, which tend to lose in a risk-off environment, were all lower against their US counterpart on Monday. The Canadian dollar was also sensitive to volatility in oil prices following OPEC’s supply decision.

In emerging markets, the Turkish lira was a big gainer, with dollar/lira trading lower by around 2% after Turkish President Tayyip Erdogan and his AK Party secured victory in Sunday’s presidential and parliamentary elections.

Day ahead: Ifo surveys for Germany and US new home sales due out on quiet data-day; updates on trade to be closely watched

Monday’s calendar is a rather light one, with the Ifo business sentiment surveys for Germany, as well as new home sales data out of the US being the day’s important releases. Any trade updates would either way attract attention, but will perhaps be more closely watched in light of a calendar that is lacking much in terms of releases.

The Ifo Institute’s reports gauging business morale in Germany are scheduled for release at 0800 GMT. The business climate, current conditions and expectations indices are all anticipated to slightly ease compared to May’s respective readings and thus point to worsening sentiment in the eurozone’s largest economy. Specifically, the business climate index, which perhaps generates most interest, is projected to record its seventh monthly decline, while falling to its lowest since H1 2017.

Out of the US, new home sales are expected to have increased by 1.5% m/m in May, after declining by the same proportion in April. The numbers are due at 1400 GMT.

Of course, trade developments (discussed above) will also be eyed, having implications not just for currency markets, but also equities, bonds and commodities.