FX market outlook

FX market outlook

Posted on Thursday, July 19 2018 at 8:56 am GMT+0000

US dollar off highs on profit-taking; UK retail sales to be watched for rate clues

Here are the latest developments in global markets:
  • FOREX: The US dollar was off the previous day’s multi-month highs versus its major counterparts on profit-taking, although it was holding firm on the back of optimism from the Federal Reserve Chair Jerome Powell about the prospects of the US economy. The dollar looked set to retest these highs as it was receiving support from what was becoming the main scenario of two more rate hikes in the remainder of 2018. On the other hand, worries about a US-China trade war sunk the Chinese yuan to a 1-year low.
  • STOCKS: After yet another positive session on Wall Street – at least for two out of the three major indices as the Nasdaq retreated marginally but stayed near its all-time high – the mood was a relatively positive one. However, Asian markets were relatively flat and European stocks looked to open flat. Positive earnings from US investment bank Morgan Stanley helped financials higher while other earnings were also positive. Strong earnings growth and Chair Powell’s upbeat testimony helped allay any concerns that a trade war might hurt corporate profitability.
  • COMMODITIES: Gold was struggling near its 1-year low, as dollar strength and the prospect of even higher rates from the Federal Reserve sapped demand for the yellow metal. Gold marked a low around $1222 an ounce. Oil managed to gain by more than a dollar to around $68.67 a barrel after oil inventory data released out of the US showed strong demand for gasoline (-3.1m) and distillates (-0.37m) that were interpreted as more important than the 5.8 million build in crude oil stocks.

Major movers: Australian employment numbers strong but weak yuan limits aussie gains

The main economic news out of the Asian session was the release of Australia’s employment numbers for June. The country’s employment change was a stronger-than-expected 50.9 thousand (the expectation was for a 16.7 thousand increase) and most of the employment increase involved full-time jobs as well (41.2 thousand). The employment participation rate also climbed to 65.7% from 65.5% (expected and previous). The unemployment rate held steady at 5.4%. Of course one can debate the relative importance of strong economic indicators for the aussie, given that the Reserve Bank seems to be firmly on hold and it would take a lot of positives to move it off the fence so to speak. Still after the report, the aussie climbed to 0.7440, only to drop back below 0.74 – possibly on concerns about a looming trade war and the impact, it would have on China. The Chinese yuan’s drop to a 1-year low was a possible negative which curtailed the aussie gains.

The kiwi from its part recorded sizeable losses – possibly driven by selling against its Australian counterpart after Australia’s strong jobs numbers and as Chinese developments also put pressure on both commodity currencies.

In other news, Japan’s trade balance for June was better-than-expected at 721 billion yen compared to expectations of a 534 billion surplus. However, this was maybe not as positive as the headline figure suggests as the reason for the beat was that both import and export growth missed expectations but import growth by a much wider margin. Dollar/yen remained below the previous day’s 7-month high of 113.12 to trade at 112.85.

Day ahead: UK retail sales to move pound; US Philly Fed Manufacturing index in focus

Following slower-than-expected CPI readings, retail sales will be next to drive the pound on Thursday at 0830 GMT amid Brexit-fueled political noise in the UK. According to forecasts, retail sales are expected to lose steam in June, posting a growth of 0.2% month-on-month (m/m) compared to a rise of 1.3% in the previous month. This could be the third consecutive month of weakness. Excluding fuel, sales are anticipated to face a contraction of 0.3% m/m after increasing by 1.3%. In yearly terms, the headline gauge is seen softer by 0.2 percentage points, while the core equivalent is projected to lose more, dropping from 4.4% to 3.5%.

Another discouraging surprise in economic data could pressure the pound back down to 1.30 as this could question whether a rate hike is appropriate to be delivered in August in times when consumption, a key element for growth, shows signs of waning, while Brexit risks continue to weigh on the business sentiment. On the other hand, an upbeat report could lift cable in speculation that BoE policymakers could feel more comfortable to raise rates in order to drive inflation towards the BoE price target of 2.0% when consumption continues to move in positive territory.

In the US, the Philadelphia Federal Reserve Manufacturing Index due at 1230 GMT will be of greater importance in terms of data releases, probably indicating that business conditions in the state have improved in July. Analysts predict the index to have bounced from 19.9 to 21.5 in July, remaining near the average of the past two years. Initial jobless claims for the week ending July 14 will be out at the same time, with projections being for an increase of 220k in the number of people applying for unemployment benefits for the first time. In the preceding week the number stood at 214k.

Still, the Fed chief’s hawkish tone on the economy at his two-day semi-annual testimony on Tuesday and on Wednesday, which turned markets more confident that two more rate hikes could be delivered this year, could maintain positions strong on the currency even in case the data appear less appealing. Trade risks though continue to hang in the background and any potential escalation in the already tense trade environment could disturb the dollar’s rally.

As for today’s public appearances, the executive director of international at the Financial Conduct Authority, Nausicaa Delfas, will be giving a speech on Brexit at 0830 GMT. A meeting between the Russian Energy Minister Alexander Novak and Chinese officials in China to discuss energy cooperation could attract some interest, while in Buenos Aires in Argentina, the ECB Executive member, Benoit Coeure will be participating at the G20 finance ministers and central bank governors and deputies meeting, which will conclude on July 22.