FX market outlook

FX market outlook

Posted on Monday, December 3 2018 at 9:50 am GMT+0000

Risk-on sentiment resumes as trade storm eases

  • Stocks up, dollar down as trade fears ease
  • French President Macron under political pressure but euro heads up
  • Brexit risks
  • Oil surges as Russian President backs production cuts; Qatar to withdraw OPEC membership

Stocks head higher on trade relief  

The US President, Donald Trump, and the Chinese leader, Xi Jinping had progressive trade talks during their dinner on the sidelines of the G20 summit on Saturday, with the world’s largest economies deciding to ceasefire the inflamed trade war but only temporarily. Particularly, Trump agreed not to raise tariffs from 10% to 25% on January 1 and avoid any further frictions for the next 90 days, giving room for negotiations to restart immediately, while China is said to have agreed to buy a substantial amount of US products to reduce the trade imbalance.

Asian stocks were up by more than 1.0% at the time of writing and US futures were gaining nearly 2.0%, pointing to a strong open later on Monday as risk-on mode returned. Positive trade developments provided a significant boost to the risk-sensitive aussie as well, whereas the safe-haven dollar was underperforming against a basket of six major currencies, pressured by the Fed’s dovish scope on interest rates as well. In commodities, the weakness in the dollar helped gold to recover Friday’s lost ground and rise as high as $1226/ounce (+0.40%).

Apart from trade, US Nonfarm payrolls due on Friday will be the most important event to watch this week as investors are looking for clues that could put the breaks on the Fed’s rate hiking path. Recall that the FOMC meeting minutes released last week indicated that the Bank will raise interest rates in December, but in 2019 monetary policy could be reviewed with more caution.

Macron’s popularity under risk

While the Eurozone is working to resolve its budge differences with Italy, political noise in France seems to be gathering momentum as protests over fuel taxes have grown into a general anger at higher living costs. The French President, Emanuel Macron who managed to beat establishment parties that led the government for more than 30 years and whose party was less than a year old during the 2017 presidential elections, is now facing widespread opposition over his gasoline taxes the past two weeks, with the anti-government “gilets jaunes” protesters causing significant damage in the center of Paris. While national elections are not seen until 2022, questions are now rising about whether Macron could deliver on his agenda including pensions and employment reforms, which would reduce his popularity even further, or break his promises to save his political career. The news did not weigh much on the euro, with euro/dollar winning 0.55% on the day thanks to the trade relief.

May threatens to bring down the government

British lawmakers will be debating May’s Brexit plan this week before a final vote in the Parliament on December 11, which doesn’t look so promising for the UK Prime Minister amid deep divisions over the deal. On Sunday, the UK Prime Minister threated to dissolve the government If the Parliament does not approve the withdrawal agreement which seems to be the only option left less than four months before the exit date according to EU leaders. On Monday, the Attorney General is set to publish a reduced form of the legal Brexit advice despite calls from Torries for a full version. If May fails to get a Parliamentary approval for her deal next week, she could face a no-confidence vote.

In FX markets, pound/dollar is enjoying buying interest today on the back of a falling dollar, with the pair last seen at 1.2804 (+0.42%).

  Oil surges by near 5.0%

After his meeting with the Saudi Arabian Crown Prince, Mohammed bin Salman, at the G20 summit  the Russian president announced that OPEC and non-OPEC oil producers will reach a compromise to cut output for 2019 when they meet in Vienna this week. WTI crude oil and the London-based Brent surged by almost 5.0% on the day, crawling up to $53.44 and $62.19 per barrel respectively as the current slowing trade storm increased further confidence in the market.

On Monday, Qatar announced that the country would leave OPEC on January 1, ending a membership of more-than-a-half century a few days, a fact that could disrupt climate at the OPEC meeting on December 6. However, the Energy Minister of Qatar said that the decision is based on a technical and strategic change and not on political reasons.

Other highlights

The Institute of Supply Management (ISM) will issue its manufacturing index at 1500 GMT, probably bringing some movement in the dollar, while the US will see the release of the Markit/CIPS Manufacturing PMI earlier at 0930 GMT.

In terms of public appearances, eurozone finance ministers will be meeting in Brussels (1400 GMT), with the ECB President Mario Draghi and the ECB Executive board member, Benoit Coeure participating in the event as well

In the UK, Bank of England chief Economist, Andy Haldane will be speaking in the Annual Cambridge Public Lecture at 1730 GMT.

In the US, speeches are expected from Fed  Vice-Chair for Supervision Randall Quarles (1300 GMT), New York Fed president John Williams (1415 GMT), Fed board Governor, Lael Brainard (1530 GMT) and Dallas Fed President, Robert Kaplan (1800 GMT).