FX market outlook

FX market outlook

Commodity currencies rise on positive risk; US dollar steadies.

The US dollar steadied while there was some positive risk sentiment that benefited Asian stocks and currencies such as the Australian, Canadian and New Zealand dollars.  Sterling mostly held the previous day’s gains.

In the day’s key developments, the Reserve Bank of Australia’s new Governor Philip Lowe emphasized the role of inflation expectations, as persistently low inflation could become engrained in consumers’ long-term outlook.  This heightened the focus on next week’s quarterly inflation numbers, as the RBA could move to cut rates and surprise markets if inflation drops too low.  Economists view a rate cut as an unlikely event in next month’s meeting.

The Australian dollar jumped higher however as the new Governor called the currency’s present levels as appropriate.  The aussie climbed to as high as 0.7680 versus the US dollar; a 2-week high.  Positive risk sentiment, some profit-taking on the greenback and a rebound in oil prices also helped the Canadian and New Zealand dollars to strengthen to 1.3078 and 0.7195 respectively.

In the United States, a keenly awaited speech by the Federal Reserve Vice President failed to clarify matters much with respect to the timing and probability of the Fed’s next move.  Stanley Fischer said that the Fed was very close to hitting its inflation and unemployment target, while also warning against changing the monetary policy framework.  This seemed to slightly contradict Chair Yellen’s view that the economy should stay in “high pressure” mode for a period so as to repair the damage done during the financial crisis.  Fischer also said that conducting monetary policy with rates so low was difficult and that it would be more difficult for the Fed to help the economy in case of future trouble.  Nevertheless, the Fed Vice President also said that neutral rates have likely fallen due to structural changes in the economy that resulted in slower growth rates.

The euro was above the 1.10 level against the dollar at 1.1020, while dollar / yen was around the 104 mark.  The pound was doing better at 1.2246 versus the dollar, while euro / pound was at 90 pence.  The pound has rebounded from oversold levels and the news flow of the last few days has not provided any fresh incentives to drive the currency lower.

In the day’s economic news, third quarter inflation in New Zealand beat expectations by coming in at 0.2% quarter-on-quarter compared to estimates it would remain unchanged.  Year-on-year inflation was also slightly better-than-expected at 0.2% compared to 0.1% anticipated.  According to analysts, the inflation figures are unlikely to change the easing bias of the Reserve Bank of New Zealand as they do not change the general picture.

Looking ahead, the focus will be on inflation numbers out of the United Kingdom and the United States.  A drop in the value of the pound should already start feeding into retail inflation, as the year-on-year rate is set to rise to 0.9% in September compared to 0.6% in August, while core inflation is likely to have risen to 1.4% from 1.3% previously.  Inflation is also expected to pick up in the United States as the index could rise to 1.5% year-on-year in September from 1.1% in August.  Core annual inflation will likely remain steady at 2.3%.  Finally, the results of the bi-weekly milk auction could influence the kiwi.