FX market outlook

FX market outlook

Posted on Tuesday, February 5 2019 at 9:24 am UTC

Neutral RBA lifts aussie; Wall Street advances

  • Stocks climb while safe-havens tumble, without any new catalyst
  • Aussie is outperforming as the RBA wasn’t as dovish as markets expected
  • Today, services PMIs from both the UK and US will dictate the action

Stocks advance, yen crumbles as “no news is good news”

Global risk appetite returned on Monday, in the absence of any material news or fresh fundamental catalysts to speak of. US stock markets recorded decent gains, with the benchmark S&P 500 (+0.68%) closing at a two-month high, while haven currencies like the Japanese yen surrendered ground across the board. Meanwhile, the dollar climbed alongside US Treasury yields, as the risk-on sentiment led to a rotation away from bonds, which are also considered a safe asset.

It’s worth mentioning that all these moves occurred in the midst of thinner-than-usual liquidity, as China and most of Asia are on holiday celebrating the Lunar New Year. Overall, the outlook for riskier assets like equities appears constructive in the near term, as the latest signals on the trade front suggest the US-China talks may bear fruit soon, while monetary conditions have loosened after the Fed decided to hit the “pause” button.

Aussie celebrates after RBA doesn’t hint at rate cuts

The Australian dollar is outperforming early on Tuesday, after the nation’s central bank kept its policy unchanged at its meeting earlier, as was widely expected, and maintained a relatively neutral tone with respect to policy. Policymakers noted that downside risks have increased, but reiterated that growth will remain above-trend and wages will pick up eventually. Most importantly, the statement contained no hints whatsoever that officials discussed the prospect of cutting rates if the outlook deteriorates, disappointing the bears.

Accordingly, investors unwound some of their rate-cut bets, pushing the aussie higher. Note though, that a quarter-point rate cut by October is still priced in with a 35% probability, so that action remains very much on the table according to markets.

British and American services PMIs coming up

The economic calendar is relatively busy on Tuesday. The UK will kick things off with the release of its all-important services PMI for January. The service sector accounts for 80% of British GDP, so this is as good a bellwether as any for economic growth. The forecast is for a downtick, though if the disappointments in the manufacturing and construction indices for the month are anything to go by, the risks surrounding that projection may be tilted to the downside. It seems the British economy started the year on the back foot as Brexit uncertainties curtailed investment, and if the services PMI confirms as much, that could ignite speculation for a dovish tilt by the BoE when it meets on Thursday, hurting the pound.

In the US, the ISM non-manufacturing PMI for January is due. Expectations are for the index to decline, but to still remain at a very healthy level. The manufacturing index surprised to the upside last week, and if something similar occurs today, that could allay some recession fears, potentially providing a boost to both the dollar and US equities.

As for the speakers, US President Trump will deliver his State of the Union address during the Asian session on Wednesday (0200 GMT). While this is typically a non-market moving event, any hints on whether the government will shut down again soon or whether he will declare a national emergency could make for some interesting headlines.