FX market outlook

FX market outlook

Posted on Wednesday, December 5 2018 at 9:44 am GMT+0000

Stocks sink amid trade woes; BoC decision eyed

  • Trump’s trade posturing sinks stock markets
  • Bank of Canada to stand pat (1500 GMT), but may appear a touch more cautious
  • Dollar bounces after Fed’s Williams reiterates “gradual hikes”
  • Sterling remains turbulent as Parliamentary debate kicks off

Equities sink on Trump’s trade posturing

Wall Street plunged, with the S&P 500 falling by a whopping 3.24% and the tech-heavy Nasdaq Composite nosediving by 3.80%. Meanwhile, defensive assets like the Japanese yen outperformed. The mood was already sour before the US markets opened as investors digested how vague the truce actually was, and the losses accelerated after Trump resumed his posturing versus China. He questioned whether “a REAL deal” is possible, and added: “But if not remember, I am a Tariff Man”.

He did backpedal a little in subsequent tweets after markets closed, indicating he believes there will ultimately be a deal. Coupled with remarks from China’s Ministry of Commerce that the meeting with the US was “very successful”, these may explain why risk sentiment has recovered a little today. Futures tracking the US indices are higher, though note, that US markets will remain closed today in mourning for President George H.W. Bush.

BoC to stand pat, but may adopt a cautious tone amid oil plunge

The Bank of Canada (BoC) will announce its rate decision at 1500 GMT. Markets widely expect policymakers to take no action, so the focus will probably be on any signals regarding the likelihood of a rate increase at the January meeting. In this sense, the BoC’s overall tone – whether confident or not – may hinge on how the officials view the recent plunge in oil, particularly since domestic economic data have been relatively mixed lately. Even accounting for the latest rebound, crude prices are still a stunning 18.5% lower than they were at the BoC’s latest meeting, which paints a bleak picture for growth and investment in Canada going forward.

Should policymakers tweak their guidance in a slightly more cautious direction against this backdrop, the loonie may come under renewed selling interest. The risk, is that the Bank dismisses the collapse in crude as a transitory factor that doesn’t warrant a policy response, in which case the currency could surge.

Dollar rebounds as Fed’s Williams seems upbeat

The US currency recovered early losses to close marginally higher versus a basket of six major currencies on Tuesday, aided by some upbeat remarks from New York Fed President Williams. He highlighted the strength of the economy and noted that further gradual rate hikes will be appropriate. His confidence likely cast some doubt on the recent theme the Fed will pause its tightening cycle next year. The strange thing is that markets are behaving as if a pause is a done-deal, pricing in only a single hike next year amid signs the US economy is slowing. Yet, it was only natural the economy would begin to cool again as the fiscal stimulus started to fade, and the Fed has refrained from providing any concrete signal a pause is looming.

Pound goes for another ride as Brexit turmoil intensifies

Tuesday marked another turbulent session for the British pound amid a flurry of Brexit headlines. The currency initially jumped after the European Court of Justice said the UK can unilaterally reverse the Article 50 process, if Parliament chose to. That didn’t last though, and the currency gave back all its gains to close lower, as the Parliamentary debate on the deal kicked off. The government lost three consecutive votes, which in essence granted Parliament greater power to shape Brexit if May’s deal is rejected, something that looks all but certain at this juncture.

The heightened uncertainty is weighing on sterling and may continue to do so in the coming days as the debate rages on. That said, greater Parliamentary control over this process is not necessarily a negative development as far as the pound is concerned. A majority of MPs are relatively moderate and hence, may stir things away from a no-deal Brexit as much as possible, and towards what has been dubbed as the “Norway plus” model. Not to mention that in case speculation for a reversal of Brexit gets any wind at all, the currency could explode higher. In terms of UK data, the all-important services PMI for November is due out today.