FX market outlook

FX market outlook

Posted on Monday, September 17 2018 at 9:01 am GMT+0000

Dollar recovers as trade tensions resurface

Here are the latest developments in global markets:

  • FOREX: The US dollar is down by a marginal 0.05% against a basket of six major currencies on Monday, largely holding on to the safe-haven gains it recorded in the previous session as concerns regarding a US-China trade escalation resurfaced. There was little movement elsewhere in the FX market, with investors appearing somewhat reluctant to initiate new bets with the risk of fresh tariffs being imposed soon hanging in the background.
  • STOCKS: Wall Street ended practically flat on Friday, with gains early in the session being largely wiped out after headlines that the US plans to move forward with imposing tariffs on China, despite the US request for negotiations last week. The S&P 500 and the Dow Jones both gained a marginal 0.03%, while the tech-heavy Nasdaq Composite inched down by 0.04%. Anxieties seem to have lingered, as futures suggest a lower open for the S&P, Dow, and Nasdaq 100 today. The same was true in Asia, where most markets closed in the red on Monday. In Hong Kong, the Hang Seng fell by 1.38%, while South Korea’s Kospi 200 dropped by 0.69%. In Japan, markets remained closed for a public holiday. Market sentiment was sour in Europe as well, with futures tracking all the major benchmarks pointing to a significantly lower open today.
  • COMMODITIES: Oil was slightly higher on Monday, with WTI being up by 0.17% at $69.13 per barrel and Brent trading higher by 0.15% at $78.25 a barrel. The bulls so far seem undeterred by worrisome news on both the supply and the demand fronts. US drillers added two new oil rigs in the previous week according to Baker Hughes data on Friday. Meanwhile, a looming escalation in the US-China trade standoff is increasingly clouding the outlook for future oil consumption, with prices likely to remain sensitive to any updates. In precious metals, dollar-denominated gold is up by nearly 0.20% on Monday at $1195 per ounce, attempting to recover some of the notable losses it posted on Friday as the US currency surged.

Major movers: Dollar bounces as trade tensions come back on the radar

The US dollar rebounded sharply on Friday to close the day higher against all its major peers, recovering losses it had posted earlier in the session. The bounce followed US retail sales data for August, which were softer than anticipated, though July’s prints were revised notably higher – helping to paint an overall positive picture for consumer spending. A few hours later, the greenback got another boost, this time from safe-haven inflows after media headlines suggested the US administration plans to move forward with the $200bn tariffs on Chinese goods it had threatened earlier. Indeed, the WSJ reported over the weekend the US will impose tariffs on $200bn Chinese goods as early as today, but at a reduced level of 10% – much lower than the 25% touted earlier.

To complicate things further, China hinted that if the US does implement levies, it will probably reject the recent US proposal for talks, as the nation won’t negotiate “with a gun pointed to its head”. Overall, the relentless pressure from the Trump administration looks unlikely to subside anytime soon, at least not before the looming US midterm elections. At the same time, Chinese officials appear unwilling to “lose face” by caving to US demands, so another escalation in tensions looks all but inevitable. A potential US tariffs announcement today coupled with the typical threats of more to come, could take a toll on risk appetite – triggering a rotation back into haven-perceived assets like the yen and dollar, and out of riskier ones like the aussie or equities. In this sense, aussie/yen may be an ideal proxy for further trade anxieties.

Elsewhere, the Brexit saga remains as eventful as ever. In a post on Sunday, former UK foreign minister Boris Johnson fired another round of criticism at the government, writing that the UK is headed for a “car crash” under the Chequers plan. The next weeks will be particularly interesting as they could see PM Theresa May’s position being challenged by hardline Brexiteers in her party like Johnson, when the annual Conservative Party conference kicks off on September 30. Hence, sentiment surrounding sterling will likely remain fragile leading up to the event, given the risk that May could be replaced by someone seeking a “clean exit” from the EU.

Day ahead: Trade concerns resurface; Eurozone final inflation figures and NY Empire State Manufacturing Index due

Trade fears will be in the forefront once again on Monday as sources from the Wall Street Journal reported that the US is preparing to announce additional tariffs against China as soon as Monday. Washington is expected to unleash import tariffs on $200 billion Chinese products, the biggest list in the multi-month trade dispute so far, with analysts anticipating Beijing to take countermeasures as well in the wake of further restrictions. The news come a few days after the US showed some sympathy by proposing to restart negotiations between the nations, with China welcoming the invitation. However, tensions might intensify even more if China refuses to hold talks with the US next week, forcing investors to shift funds from riskier assets to safe-havens, a move that could harm trade-sensitive currencies such as the aussie as well as the volatile emerging markets. Yet the dollar might remain resilient to heightened trade risks, supported by investors’ optimism on the path of the US economy. The size of the tariffs will be closely watched as sources believe that this will probably be around 10%, compared to the 25% that was under consideration.

In terms of data releases out of the US, the New York Fed Empire State Manufacturing Index will attract attention at 1230 GMT. The index is said to have eased in September, falling from 25.60 in August to 23.

Earlier at 0900 GMT, the release of the Eurozone Harmonized Consumer Price Index (HCPI) for the month of August will be another event in focus today, though the euro might not react much as those will be the final readings. Eurostat is projected to revise the monthly HCPI, which uses a common methodology across EU countries, up to 0.2% compared to the initial estimate of -0.3%, while in yearly terms, HCPI is expected to come at 2.0% in line with preliminary data. Regarding the core measure, which excludes food, energy, alcohol, and tobacco, this is said to arrive at 0.2% m/m versus the initial forecast of -0.5%, leaving the yearly gauge steady at 1.0%. Should the headline HICP surprise to the upside, indicating that inflation in the eurozone holds above the ECB’s price target of “below but close to 2.0%”, the euro could move north.

As for public appearances scheduled for today, a number of speeches are planned by ECB members. At 0900 GMT, ECB Board Member Benoit Coeure will be making comments at the German Institute for Economic Research in Berlin. Later at 1015 GMT, ECB Executive Board Member Peter Praet will be speaking on “Economic developments in the euro area” at Société Royale d’Economie in Brussels, while at 1200 GMT, ECB Executive Board Member Yves Mersch will step up to the rostrum for the unveiling of the new €100 and €200 banknote at the ECB headquarters in Frankfurt.