FX market outlook

FX market outlook

Dollar eases from 10-month high against yen, focus turns to Bank of Japan.

The US dollar started the new trading week by retreated from a 10-month high against the yen due to some risk aversion in the markets today. China-US relations were put to the test over the weekend due to news late on Friday of the seizure of a US underwater drone by China in international waters in the South China Sea. Tensions between the two nations created some market jitters.

The dollar fell below the key 118-yen level and touched an Asian session low of 117.08 today. On Thursday, the greenback hit as high as 118.65 yen.

The markets are turning their attention to the Bank of Japan’s policy decision due on Tuesday after a meeting that started today.

Meanwhile, Japanese trade data early in the session showed a surplus of 152.5 billion yen in November for the third month in a row. The impact of the weaker yen meant exports fell at a slower pace in November by 0.4% year-on-year, compared to a 2% annual decline expected by economists.

Tomorrow, the Bank of Japan is expected to hold its negative interest rates and 10-year JGB government bond yield target steady. The Bank is also expected to keep the pace of the annual increase in JGB holdings at around 80 trillion yen. The yen has weakened significantly versus the dollar as a result of the BOJ’s policies.

Another event that will be in focus today will be Fed Chair Yellen’s talk at the University of Baltimore’s mid-year commencement. Investors will get an opportunity to get some insight on Yellen’s assessment of the US economy as she will be speaking on the State of the job market.

Looking to the rest of the week, there is a slew of US data which could impact the dollar. This will include durable goods orders for November (expected to fall), personal income and personal spending, and final GDP for the third quarter. This will be the third estimate of the growth figure and it is not expected to change from the second estimate’s 3.2% growth rate (which was upwardly revised from an initial estimate of 2.9%).

More data out of the US on Friday include the final University of Michigan consumer sentiment report and new home sales.

In other currencies, the euro rose against the dollar to a session high of $1.0478. Later in the day, focus will be on Bundesbank President Jens Weidmann who will be speaking at Brussels conference. The German Ifo report is also due today.

The Australian dollar traded below the key $0.7300 level after touching a session high of $0.7312.

In commodities, oil prices were on track for a third straight day of gains, with Brent crude rising back above $55 a barrel while WTI oil rose above $52 a barrel.

Gold was higher today to trade at $1,142.23 an ounce.