FX market outlook

FX market outlook

Posted on Thursday, December 8 2016 at 8:29 am GMT+0000

Euro edges higher as focus turns to crucial ECB meeting; China reports upbeat trade data.

Market sentiment was upbeat in the Asian session today and received an added boost after China reported much better than expected trade data. Both imports and exports rose to leave a trade surplus of $44.6 billion. China is the second largest world economy, and today’s data is an indication of stronger global, as well as domestic demand.

Imports rose 6.7% year-on-year, contrary to expectations of a 1.3% decrease, while exports increased 0.10% year-on-year versus a projected 5% decline. Both readings rebounded from the previous month.

The Australian dollar benefitted from the Chinese data since China is a major trading partner for Australia. The aussie recouped losses against the greenback made earlier in the session following disappointing Australian trade data, and rose to a session high of $0.7507, the strongest level since November 16. Australia reported a deficit of A$1.54 billion in October, wider than the A$800 million deficit expected.

Data out of Japan today showed a downward revision to third quarter GDP. In a final estimate, GDP was revised to show an annualized 1.3% pace of growth, down from a preliminary estimate of 2.2% growth. One factor behind the unexpected cut in the initial reading was a decline in business spending.

Despite the weak data out of Japan, the yen was stronger against the dollar in the Asian session and the USDJPY pair slid to a low of 113.12 yen. The greenback is broadly weaker today, with the dollar index down 0.2% at 100.01.

The euro strengthened ahead of a key European Central Bank policy meeting later today, to reach a session high of $1.0783. The single currency is holding near a 3-week high that was hit earlier this week and has made a quick recovery from a 21-month low touched after the result of a “no” vote in the Italian referendum on constitutional reform on Sunday. The ECB meeting today will be in focus as it could impact the euro. All eyes will be on the central bank to see if it will extend its quantitative easing programme (QE) beyond March 2017, when it is due to end.

The ECB’s current asset purchase programme stands at 80 billion euros a month. Expectations are for the QE deadline to be extended by six months and for the size of asset purchases to remain unchanged. The benchmark refinancing rate is expected to remain at 0%.  ECB President Mario Draghi’s press conference shortly after the policy announcement will be closely watched.

Aside from the ECB meeting, which will be the highlight of the day, US jobless claims data are due later in the day.