FX market outlook

FX market outlook

Posted on Thursday, February 21 2019 at 9:43 am GMT+0000

Dollar ticks up after Fed minutes; aussie sinks

  • Dollar ticks up after Fed minutes keep possibility of rate hikes alive
  • European PMIs and ECB minutes highlight today’s agenda
  • Aussie torpedoed as Chinese port bans Australian coal imports
  • High-level trade talks resume in Washington

Dollar crawls higher as Fed minutes aren’t as dovish as expected

The minutes of the January Fed meeting confirmed the central bank will stay sidelined for a while amid several uncertainties, particularly in the global outlook. There was also broad consensus to end the balance sheet runoff soon. Yet, officials also retained a shred of optimism, indicating that the US economy remains solid, with “several” members maintaining that rates could be raised again “later this year” – conditional upon inflation picking up. The overall tone – and especially the fact that rate hikes were not taken completely off the table – was likely a touch less dovish than markets had anticipated, helping the dollar to rebound alongside US bond yields.

Where does this leave the dollar? While a major rally from current levels seems unlikely given that the Fed seems to be at – or at least near – ‘terminal rates’, any major downside seems equally unlikely as long as other major currencies like the euro and sterling lack appeal. That said, there are risks in the near term, with the most notable being a resolution in the trade conflict that leads traders to scale back their safe-haven bets on the dollar, or a strong rebound in European growth that helps the euro become the ‘comeback kid’ again.

Today, US durable goods orders for December are on the docket, as well as the flash Markit PMIs for February.

European PMIs and ECB minutes to dictate euro’s path

It will be a pivotal session for the single currency, with preliminary PMIs (09:00 GMT) for the euro area and minutes of the latest ECB meeting (12:30 GMT) both on the docket. The PMIs for February are expected to show some stabilization, which on the margin could help the euro recover somewhat. Admittedly though, for a major and sustained recovery, these prints would probably need to come in much higher than expected, which seems unlikely for now given political and trade risks clouding the outlook.

As for the minutes, they are unlikely to reveal much on policy beyond what Draghi signaled back at that meeting. Namely, that the bloc’s slowdown is worrisome, but not severe enough to derail the Bank’s normalization plans. Markets could focus mainly on the discussion around a new round of long-term loans to commercial banks, the so-called TLTROs.

China bans Australian coal imports, torpedoes Aussie

The Australian dollar took a major hit earlier in the session, giving back some gains it had recorded on robust employment data to trade much lower overall, following reports that China’s Dalian port had banned imports of coal from Australia. Meanwhile, major ports throughout China will prolong clearing times for Australian coal.

Coal is among Australia’s biggest exports, and China is the nation’s largest export market, so the news likely painted a bleak outlook for Australia’s terms of trade going forward. The China-sensitive kiwi dollar is also much lower on the session, in sympathy to the aussie.

Markets quiet, look to trade talks for impetus

The wasn’t much else in the broader market, with US stock indices managing to close in the green, albeit only modestly so. It will be a crucial couple of sessions for risk appetite, as senior officials will take over the US-China trade talks in Washington. Expectations for a deal, or at least an extension of the March 1 deadline, are currently riding high as evidenced by the sustained gains in equity markets and any remarks by key officials like Lighthizer could prove pivotal.