FX market outlook

FX market outlook

Posted on Tuesday, February 7 2017 at 9:52 am GMT+0000

Aussie briefly rises after RBA holds rates; kiwi jumps on inflation expectations.


The antipodean currencies were in focus in today’s Asian session due to news headlines out of the region. The Reserve Bank of Australia announced its policy decision to hold rates while inflation expectations in New Zealand were up. 

The aussie rose against the greenback after experiencing some volatility soon after the RBA policy decision and oscillated in a range of half of 1 percentage point during the session. It eventually reached a session high of $0.7680 before reversing back down due to broad risk aversion. The Australian central bank held its main cash rate steady at a record low 1.50 percent, as expected, and maintained a neutral stance on the interest rates outlook. This was the bank’s first policy meeting for 2017 and was relatively optimistic about the global economy but noted some uncertainties remain. As far as the domestic economy is concerned, it was positive on Australian economic growth prospects and expects fourth quarter GDP to make an improvement.

The kiwi saw a big jump against the US dollar due to inflation expectations. A survey of expectations showed that long term inflation is anticipated to rise sharply to come close to the RBNZ’s explicit target of 2 percent in two years’ time. NZDUSD rose on the news by nearly half a cent to a session high of $0.7374. In other news out of New Zealand, RBNZ Governor Graeme Wheeler announced that he will be stepping down when his term ends in September.

Overall risk aversion in the markets today capped gains in the ausssie and the kiwi and both currencies reversed earlier session moves. The US dollar was broadly stronger and the yen was in demand as a safe haven asset. Political risk appears to be dominating the markets as several elections in Europe, particularly in France, are causing some concerns. This resulted in a weaker euro.

The single currency was also hit by comments from ECB President Mario Draghi on Monday, who reiterated that underlying inflation in the Eurozone remains very subdued. He also downplayed calls for the ECB to scale back its current stimulus program. The euro broke below the key $1.07 level today to touch a new one-week low of $1.0680 in late Asian session trading.

Sterling was also weaker against the dollar today after failing to rise back above the key $1.2500 level.

The dollar broke below the key 112-yen level yesterday due to risk aversion and struggled below this level in Asian trading today. After touching a session low of 111.58, also a two-month low, the dollar steadied and rose back above 112.00.

Looking at the economic calendar today, German industrial production figures for December 2016 was down by 3.0%, missing expectations for a 0.2% increase, further hurting the euro. For the rest of the day, the Halifax House Price index is due out of the UK, while US and Canadian trade data are expected. The US JOLTS data will also be reported later in the North American session.