FX market outlook

FX market outlook

Posted on Monday, February 18 2019 at 9:45 am GMT+0000

Stocks & commodity currencies cheer trade optimism

  • Risk sentiment buoyed by signs of “progress” in US-China trade talks
  • ECB’s Coeure sends the euro lower, but single currency bounces back
  • US and Canada closed for today, attention may be on Brexit

Stocks rally alongside commodity currencies amid trade “progress”

Encouraging headlines around the US-China trade talks boosted global risk sentiment on Friday, following the conclusion of the high-level talks in Beijing. Both sides played up hopes for a deal, with President Trump saying the negotiations are “going extremely well” and Chinese state media even claiming a “consensus in principle” has been agreed. The talks will continue in Washington this week.

Accordingly, US stock markets grinded higher, with both the S&P 500 (+1.09%) and the Dow Jones (+1.74%) advancing to 2½-month highs, with the S&P importantly also clearing its key 200-day moving average. In the FX spectrum, commodity-linked currencies like the aussie, kiwi, and loonie outperformed, drawing strength from gains in actual commodities. Meanwhile, the dollar surrendered ground, as the diminishing risk of further escalation seemingly diverted haven flows out of the world’s reserve currency, which has been acting as a defensive asset on trade issues.

Overall though, some cause for caution remains. While the trade headlines are optimistic for now, there haven’t been any details on what was agreed so far, where progress was made, or on anything else for that matter. Moreover, overnight reports suggest the US Commerce Department has completed its report on auto tariffs, though the results have not been publicized. Remember, such reports typically precede the introduction of tariffs. Hence, while the likelihood for a deal with China seems to be growing, one wonders whether the EU may be next in line after those talks wrap up, as the White House seems to prefer negotiating on one front at a time.

Coeure torpedoes euro after hinting new TLTROs are “possible”

The euro dived on Friday, following some remarks from ECB Executive Board member Coeure, who suggested policymakers are discussing the prospect of another round of long-term loans for banks, the so-called TLTROs. This was likely seen as a taste of what is to come at the ECB’s upcoming meeting in March. On the political front, news that Spain will head to early elections in late April probably didn’t help either.

Yet, euro/dollar managed to recover most of its losses to close the session only marginally lower, mainly due to softness in the dollar. Besides trade optimism, some remarks by the Fed’s Daly that she doesn’t see a rate hike this year likely contributed in dragging the dollar down as well. Going forward, the pair will most likely take its cue from the minutes of the latest Fed and ECB policy meetings, due out on Wednesday and Thursday respectively.

Coming up: Brexit on the radar as US takes the day off

The economic calendar is practically empty on Monday.

US and Canadian markets will remain closed for the Presidents Day and Family Day holidays respectively. This implies liquidity may be thinner than usual, so sizeable moves may occur with little in the way of news behind them.

Attention will most likely be on the UK, considering recent reports that some Labour lawmakers are considering breaking away from their party amid disagreements over how their leadership is handling Brexit. In particular, that the party is backpedaling on its previous commitment to seek another referendu