FX market outlook

FX market outlook

Trade optimism not very helpful; US-Sino trade talks conclude today

• Stocks gain little on trade news as more clarity needed
• Antipodeans weaken, dollar strengthens
• Trump addresses nation on Tuesday to discuss border
•        EU and British officials said to be discussing Brexit delay 

Trade hopes rise as US-Sino negotiations conclude

Trade headlines will top market interest on Tuesday as Chinese and US officials conclude their two-day meeting in Beijing. This is the first face-to-face contact after Trump and Xi Jinping agreed at the G20 summit on December 1 to cease fire new tariffs until March 1 and investors are hopeful that the two sides could be in rush to reach a common ground as negative economic consequences have started to emerge, especially in China.

Optimism heightened even further on Monday after the Chinese Vice Premier, Liu He made a surprise appearance at the vice-ministerial level trade talks, a sign that Beijing is willing to strike a deal with the US. In the same day, the US Commerce Secretary, Wilbur Ross, expressed that both governments could reach an agreement that “we can live with” encouraging markets even more that the outcome of the negotiations will be positive.

In the aftermath, Dow Jones and S&P 500 closed with moderate gains on Monday, while on Tuesday stocks in Asia traded mixed, with Japanese equities moving in the positive territory and Chinese ones in the negative despite China stepping more liquidity on Friday. This indicates that investors are not totally convinced that trade negotiations could make progress at the end of the day, probably asking for more clues in advance to push up buying orders.

Moreover, the notion that the Fed may not deliver two rate hikes in the new year seems to be supporting investors sentiment the past few months, though a lot of uncertainty remains behind the topic and hence volatility is expected to continue dizzying markets until the Fed gives a clear rate guidance. FOMC meeting minutes for Wednesday delivery are next in line to impact market rate projections. Recall that the US services sector grew at a slower pace in December according to the ISM calculations on Monday, though did not deteriorate as much as the manufacturing industry did.

Dollar rebounds after three days, antipodeans weaken despite trade news

In FX markets, the dollar was on the recovery on Tuesday against six major currencies, with dollar/yen crawling up to 109 after almost a week. The antipodeans, though, which had a respectful rally the previous two day, reversed to the downside despite optimistic trade headlines. The kiwi declined by 0.25% while the fall in the aussie was double that percentage probably due to missing proof of progressive trade talks. Weaker-than-expected trade stats out of Australia probably weighed on sentiment as well. The data showed that the Australian trade surplus narrowed for the second consecutive month in November, while October’s mark was revised downwards.

Besides trade, investors will be also watching political developments in the US as fears over a government shutdown persisted for the 17 day on Monday, with public services operating partially as many federal workers could miss their paycheck this week. President Trump and Democrats did little to resolve their budget differences mainly due to Democrats’ strong opposition on the funding of the border wall. Specifically, the US President asks for $5.6 billion, while democrats are only willing to accept $1.3 billion for border security but nothing for a wall.

The debate is expected to continue later in the day, with Trump’s TV address on Tuesday eagerly awaited.

Brexit keeps pressuring buying interest in Europe; Eurozone economic sentiment index pending

Turning to Europe, market confidence held weak as the Brexit issue kept investors cautious, with pound and euro paring yesterday’s gains against the greenback. While questions remain about whether May will manage to achieve the assurances from the EU, the Daily Telegraph reported that EU and British Officials are discussing potentials of postponing the exit date amid concerns that the British Parliament will not approve it by March 29. According to BBC, the Brexit vote in the Parliament is expected to take place on January 15.

Monetary policy is another puzzle in Europe. The BoE is not willing to raise interest rates until it gets more clarity on Brexit, while the ECB, which terminated its asset purchase program in December, told that a rate hike would only come after summer 2019. Yet markets are not certain if the latter will stay on course as policymakers failed to drive core inflation towards the 2.0% price target in 2018.  Data showed early today, that German industrial output posted its biggest decline in two years in November, while later in the day the focus will shift to the Economic sentiment index due at 1000 GMT. Yesterday the Sentix investor confidence index for the month of January indicated that pessimism among investors increased but by less than analysts predicted.