FX market outlook

The final US Presidential debate helped risk assets and the Mexican peso as Republican candidate Donald Trump did not seem to take the opportunity to score major points versus his Democratic opponent Hillary Clinton.  Other surveys and speeches pointed to a Fed rate hike this year, which boosted the dollar.

The Mexican peso initially rallied following the debate between Hillary and Trump, as USDMXN made a 6-week low of 18.45.  Profit-taking and a small correction in oil (last at 51.43) made the peso give up some of those gains and the pair climbed back to 18.55.  Clinton was still seen as a strong favorite after the final debate as polls indicated that Trump failed to win yet another duel.

The US dollar pushed the euro down to 1.0951 and managed to recover versus the Japanese yen to 103.77 as New York Fed President William Dudley gave his clearest indication yet that the Fed was likely to hike rates.  He said that it was likely the Fed would raise rates later this year provided that the economy remains on track.  This was in line with other recent Fed officials’ views, which indicates the committee might be leaning towards more unanimity in favor of a rate hike soon.  Dudley voted in favor of keeping rates unchanged back in September and he is seen as one of the three most influential Fed officials – the others being Chair Yellen and Vice President Fischer.  The Beige Book survey of regional economic conditions also painted a positive picture of the US economy, as some regions went as far as to report labor shortages in certain sectors.  Housing starts and building permits for September released earlier on Wednesday gave mixed indications.

The Australian dollar lost substantial ground versus the US dollar after failing a test of its 7-week high at 0.7732.  The aussie had been boosted by oil’s rise to a 2016 high of $52.21 per barrel as well as generally positive risk sentiment.  The session’s most important economic release went against the aussie however, as Australia’s September employment report was disappointing.  Employment contracted by 9.8 thousand instead of expanding by 15 thousand that was expected, while the labor force participation ratio dropped to 64.5% from 64.7% the previous month.  Unemployment did remain steady at 5.6%, but that was more the result of the shrinking labor force.  The Australian dollar dived back to 0.7663 as a result of the weak data, which could mean that the Reserve Bank could continue to cut rates because of labor market weakness.

The Canadian dollar was another loser following the Bank of Canada’s downgrade of the country’s growth outlook.  The market was unsure of what to make of the monetary policy announcement as it initially sold USDCAD all the way down to 1.3005, but the pair rebounded to 1.3163 at the time of writing.  It’s possible that the loonie also tracked the slight correction in the price of oil, which peaked above 52 on Wednesdayafter a huge 5.2 million draw in US crude oil inventories.

The focus on Thursday will be the European Central Bank meeting and the press conference of its President Mario Draghi.  The ECB is not expected to alter its present policies, while most economists believe that an extension of its QE program – which ends in March 2017 – will only be announced in the December meeting and not today.  Therefore expectations are that Draghi will say that the ECB is keeping its current policy unchanged while standing ready to do more if necessary.  One interesting point will be Draghi’s views on the latest economic numbers out of the Eurozone – particularly inflation, growth and unemployment.

Aside from the ECB announcement and press conference, UK retail sales, weekly US jobless claims, Philly Fed survey and existing home sales for September will also attract some attention.