FX market outlook

The US dollar was trying to regain some ground following a selloff, as President Trump as well as an administration official responsible for trade policy, castigated countries like China, Japan and Germany for their currency policies.

Specifically, Trump and his administration official Peter Navarro said that other countries were using undervalued currencies to gain an unfair advantage.  This created concern to dollar bulls that the greenback would now also become an instrument of trade policy, together with other protectionist measures that the Trump administration is planning.  The dollar index is now up around 2% since the US Presidential election, compared to gains of 6% when it peaked earlier in January.

Still, many in the market believe that the US dollar will draw strength from a relatively hawkish Fed, as the bank’s policy statement will be released later today.  Despite the prospect of Trump talking down the dollar, the Fed is still expected to raise rates this year by 2 or 3 times as inflation is seen as firming up.

Dollar / yen was up to 113.60 from the two-month low of 112.07 struck the previous day, while euro / dollar failed once again to hold the 1.08 mark and fell to 1.0780.  Pound / dollar was a little more resilient at 1.2567 despite unsuccessful attempts of breaching 1.26.

In economic news, Chinese purchasing manager surveys for January were relatively upbeat, as manufacturing PMI fell slightly to 51.3 from 51.4 – but still exceeded consensus which was at 51.2, while non-manufacturing or services PMI rose to 54.6 from 54.5.  The surveys showed that China’s economy was doing well at the beginning of the year and barring an accident, it should meet its 6.5% growth target.  China was still closed for the Lunar New Year Holiday today, but Hong-Kong returned to work today.

The New Zealand dollar dropped to 0.7270 from highs just below 0.7350 against the US dollar after a steep rise in the country’s unemployment rate.  Unemployment during the fourth quarter jumped to 5.2% from 4.9% the previous quarter and 4.8% that was expected by economists.  It will be interesting to see whether the news will impact the Reserve Bank’s monetary policy.  Elsewhere, Japanese manufacturing PMI was more or less in line with expectations at 52.7.

Looking ahead it will be a relatively busy day as Eurozone final manufacturing PMI and UK manufacturing PMI will be released.  Out of the US, the ADP payrolls number could set the stage for Friday’s employment report, while a little later the manufacturing ISM PMI will come out.  Finally, all eyes will be on the Federal Reserve’s policy statement in late session for any hints of what could happen in March as no change is expected today.