FX market outlook

FX market outlook

Posted on Wednesday, January 9 2019 at 9:58 am GMT+0000

FOMC minutes and BoC rate decision in the spotlight

  • In the US, minutes from the latest FOMC meeting will be scrutinized for clues on whether a pause in rate hikes is indeed in order
  • In Canada, the BoC will meet and attention may fall on whether policymakers are growing more cautious
  • Overnight, China releases its updated inflation data

FOMC minutes eyed for rate guidance amid recession fears

The dollar advanced nearly across the board on Tuesday without any major US-specific catalyst, instead capitalizing on weakness in the euro, which softened after German industrial data disappointed, amplifying worries that Eurozone’s powerhouse is slowing. Today, the main event in the US will be the release of the December FOMC meeting minutes (1900 GMT), though speeches by regional Fed Presidents Evans (1400 GMT) and Rosengren (1630 GMT) could also attract attention.

Markets seem to be pricing in a severe slowdown or even outright recession by 2020, and while the Fed until recently seemed adamant about continuing to raise rates, Chair Powell softened that position last week, indicating the Fed will be “flexible” in setting policy. The message was that if market concerns are vindicated by incoming data, his central bank won’t hesitate to pause rate increases, or even reverse them by cutting rates.

Against this backdrop, investors will look for clues around the key issues: how worried is the Fed about a slowdown? Are such worries shared among all officials, or are some still determined to normalize further? What would be the Fed’s first response if the data do deteriorate – pausing hikes or halting the balance sheet unwinding? Since market pricing now points to no rate hikes at all in 2019, anything that suggests policymakers may raise rates even once more could be met with a spike higher in the dollar, and a tumble in stocks. On the flipside, if policymakers make it clear Powell’s “flexible” approach reflects the entire Committee’s thinking, that could weigh on the greenback and boost equities.

Soaring loonie looks to BoC decision for fresh impetus

The Canadian dollar has been on a tear lately, recovering significant ground against its major peers on the back of a notable rebound in oil prices. Although oil price movements may well remain the main driver for the loonie, market attention could briefly shift back to monetary policy today, when the Bank of Canada announces its rate decision at 1500 GMT.

No action is expected, so attention will likely fall on the accompanying statement and Governor Poloz’s press conference. Canadian economic data have been treading water, and while oil is recovering, the recent plunge will no doubt curb investments in the nation’s energy sector. Meanwhile, a deteriorating global outlook and market volatility pose external risks. All in all, Poloz & Co. seem to have more incentive to deliver a cautious-sounding narrative today, with any hints the Bank could pause its hiking cycle likely to trigger profit-taking on long-loonie positions. The key risk, is that the Bank remains adamant about hiking further, in which case the loonie could extend its recent gains.

Risk appetite lifted by signs of US-China trade progress

US stock markets closed in the green for a third consecutive session yesterday, and Asian markets followed suit on Wednesday, buoyed by reports that US and Chinese negotiators decided to extend their trade talks for one more day. This was taken as a sign of progress, though neither side officially confirmed as much yet. While it still appears early for an actual deal to be struck, optimistic comments from both sides may be enough to keep risk sentiment supported in the very short term.

China’s inflation data in focus overnight

Besides the FOMC minutes and the BoC rate decision, the economic calendar is relatively light of market-moving events today. During the Asian session on Thursday, focus may turn to China’s CPI and PPI data for December, with producer prices in particular being eyed for signs of whether factory demand – and thereby the broader economy – continues to slow. The aussie, which is viewed as a liquid proxy for “China plays”, could take its cue from these prints.