FX market outlook

FX market outlook

Posted on Monday, February 25 2019 at 9:56 am GMT+0000

Aussie and Chinese stocks lifted as Trump delays tariff deadline; dollar steady

  • Trump extends March 1 deadline, citing “substantial progress” in trade talks with China
  • Aussie and Chinese shares surge on the news but overall market reaction muted
  • Pound inches higher on increased talk of Brexit delay

US and China edge closer to a trade deal

Financial markets got off to a positive on Monday as traders were greeted with President Trump’s tweets that there was “substantial progress” in trade negotiations between the United States and China last week. Trump also confirmed that the March 1 deadline when tariffs on $200 billion worth of Chinese imports would rise from 10% to 25% would be extended. The President did not set a new deadline but did hint at “very big news over the next week or two” and said he could soon hold another summit with China’s President Xi to seal a deal.

Risk sentiment had been riding high since early February that a trade deal is becoming within reach, helping global equities extend their yearly gains. News that the US and China have been able to bridge many of their differences over the thornier issues such as intellectual property protection and forced technology transfer strengthened expectations that an agreement between the two economic powers could be stuck soon.

The Australian dollar – considered a liquid proxy for China-related trades – was the best performer in currency markets, rising by about 0.35% to trade around $0.7153 at the European open. The Chinese yuan also got a lift from the trade developments to climb to a 7-month high of 6.6730 to the US dollar. Chinese stocks were the biggest gainers though, with the CSI-300 index surging by nearly 6% to close at 3729.48.

Other Asian bourses saw more limited gains, however, as most traders had already priced in the likelihood of an extension of the deadline. Major European indices, meanwhile, were looking at increases of between 0.2-0.4% at the start of trading according to equity futures.

Dollar unimpressed by trade headlines, eyes Powell testimony

The greenback was marginally weaker on Monday, along with the yen, as trade optimism boosted demand for riskier assets away from safe havens. The dollar index was slightly lower at 96.42, and against the yen, the US currency was last trading at 110.63.

A bigger focus for the dollar this week will likely be Fed Chairman Jerome Powell’s semi-annual testimony before Congress on Tuesday and Wednesday, as well as fourth quarter GDP growth numbers due on Thursday. Investors will be hoping Powell will reiterate the Fed’s patience stance, while any signs of unexpected sluggishness in US growth in the GDP report could renew concerns about the global economic outlook.

Kiwi boosted from data, pound up on Brexit delay talk

In other currencies, the New Zealand dollar followed the aussie higher, buoyed by goods news of its own. Retail sales in New Zealand jumped by 1.7% quarter-on-quarter in the final three months of 2018, easing fears of a significant slowdown and boosting the kiwi to around $0.6875.

The euro was slightly firmer on Monday, holding around $1.1350 as European markets opened. But the pound advanced more substantially, climbing to $1.3085 as speculation grew that the UK’s departure date from the European Union, scheduled for March 29, could be delayed.

British prime minister, Theresa May, on Sunday ruled out another meaningful vote on the Brexit deal this week but said a vote on a revised agreement will be held by March 12. However, Parliament will still get to vote on an amendable motion on February 27 and MPs will once again be trying to take control of the Brexit process. May’s yet another postponement of a meaningful vote could push more MPs to vote in favour of an extensions to Article 50. The prime minister herself is reported to be considering a delay of up to two months.

However, some reports suggest the EU is looking at plans of extending Brexit until 2021 to allow more time for negotiations and avoid further deadline delays.

Commodities subdued; quiet rest of day

Commodities were mixed on Monday, with oil moving lower and gold crawling higher. Record US oil production offset the growing optimism of a US-China trade deal, pulling WTI prices 0.4% lower to just above the $57 a barrel level. Brent was down a similar amount, while gold managed to marginally mover higher to $1328 an ounce on the back of a somewhat softer dollar.

Looking at the rest of the day, there are no major released but speeches by Bank of England Governor, Mark Carney at 10:00 GMT and Fed Vice Chairman Richard Clarida at 16:00 GMT might attract some attention.