FX market outlook

FX market outlook

Posted on Wednesday, March 27 2019 at 9:52 am GMT+0000

Dollar edges up as Treasury yields stabilize; Kiwi slumps as RBNZ hints at rate cut

– Dollar firmer despite weak US data as Treasury rally eases

– New Zealand dollar nosedives after RBNZ says rate cut more likely than a hike

– Pound choppy ahead of crucial indicative votes on Brexit in Parliament

Steadier Treasury yields help dollar regain some footing

The US dollar edged higher against a basket of currencies on Wednesday, extending Tuesday’s gains, as steadier Treasury yields alleviated the recent selling pressure, especially against the yen. The dollar index rose to a 2-week high of 96.98, but versus the yen, it was flat around 110.60 having rallied sharply yesterday.

However, market fears of a possible US recession remain heightened despite the easing of the rally in US Treasuries as the yield curve between 10-year and 3-month notes is still inverted. An inversion of the yield curve between 10-year and 3-month notes has accurately predicted a recession in the past. Data out of the US yesterday added to investors’ concerns that the American economy is slowing. Housing starts plunged by 8.7% month-on-month in February, while the consumer confidence index missed forecasts by a wide margin to fall to 124.1 in March.

Nevertheless, with the growth outlook even gloomier elsewhere in the world, the dollar remains well bid and there was additional support from a strong performance on Wall Street on Tuesday.

Pound moves sideways as indicative votes awaited; euro subdued

The British pound continued to hover around $1.32 in a choppy sideways range as traders hoped that the indicative votes due to take place in Parliament later today would provide some much-needed clarity on the next steps in the Brexit process. Lawmakers will vote at 1900 GMT on a number of possible Brexit scenarios, including a customs union, revoking Article 50 and May’s deal, in a bid to find a majority in Parliament for a way forward. However, a clear outcome is not likely today and voting is expected to continue over several days into next week until a preferred option is found.

But even as the chances of a softer Brexit rise, there appeared to be a change of tone from some key Eurosceptics in Theresa May’s party, signalling they may be ready to back May’s unpopular deal in order to prevent less favourable outcomes such as closer ties to Europe or even a cancellation of Brexit. The pound briefly spiked higher yesterday on speculation that May’s deal is not dead just yet.

The euro, meanwhile, resumed its slide versus the greenback, hitting a two-week low $1.1245, but managed to steady after ECB chief, Mario Draghi, sounded a little more upbeat about the Eurozone economy than in earlier remarks. Speaking in Frankfurt on Wednesday, Draghi said the domestic economy has remained “relatively resilient” even though the risks to the outlook are tilted to the downside.

Kiwi slumps after RBNZ surprise dovish shift

The Reserve Bank of New Zealand kept interest rates unchanged at 1.75% at the end of its policy meeting on Wednesday but said “the more likely direction of our next OCR move is down”. The increase in the dovish bias led investors to price in a 25-basis point rate cut before the year end, pulling the local dollar to 2-week lows. The kiwi dipped below the $0.68 level before recovering slightly above it but was still down by 1.4% on the day.

The Australian dollar also came under pressure as the RBNZ’s change in tone increased expectations that the RBA will follow suit with a more dovish stance. The aussie was last trading down 0.4% at $0.7104.

Looking at equities, major indices were mixed in Europe and Asia, while in commodities, both gold and oil eased from recent highs. Oil prices came close to hitting fresh 2019 highs on Tuesday amid tightening supply. Gold fell back below the $1320 level as the dollar and Treasury yields recovered slightly.

Trade talks to come back into focus

With the US economic calendar looking relatively light over the next couple of days, the markets’ attention will turn back onto trade talks between the US and China. The US trade delegation will travel to Beijing tomorrow for a new round of negotiations as hopes remain high that the two sides are moving closer to reaching a trade agreement. With fears of a global recession running high, any setback in the trade talks could have major repercussions on risk sentiment.

Fed speakers will also be watched in the coming days. Kansas Fed President Esther George is due to give a speech at 21:30 GMT.