FX market outlook

FX market outlook

US dollar near 13-year high in holiday-thinned trade.

The US dollar was holding near multi-year highs during Friday’s Asian trading, although there was also some profit-taking by dollar longs.  The dollar’s run has been an extended one, which makes it vulnerable to profit-taking.

The euro for example was trying to get back above 1.06 as it traded just below that level, while dollar/yen dipped below the 113 mark to trade at 112.89.

According to Bloomberg, the dollar’s rally against the yen during the past 3 weeks has been the strongest since 1995, as the greenback has gained more than 10% versus the Japanese currency in this short time-period.  Dollar / yen has been driven higher by a number of factors such as higher US yields (as opposed to flat Japanese yields), positive risk appetite which reduces demand for the safe haven yen and finally a worry that Trump’s trade policies could hurt export-dependent nations such as Japan.

In economic news, both Japan and Tokyo remained in deflation (excluding fresh food prices) during October and November respectively.  Core inflation for the country was down 0.4% year-on-year in October, although headline inflation was up 0.1%.  The picture for Tokyo during November was more mixed however, as core inflation also fell 0.4% but on the headline level inflation rose to 0.5%.  The figures were in line with expectations, causing few ripples on a market mainly preoccupied with the dollar’s strength.

US Treasury yields were helping to support the dollar, as the 10-year note was yielding 2.38%.  Markets are pricing in a near-certain rise in US interest rates during December’s Fed meeting, while traders were also now focusing on the prospects for rate hikes next year.

The aussie also managed to post some gains versus the dollar by trading around 0.7440.  The kiwi also managed to climb above 0.70 against the greenback by trading at 0.7032.  There was some positive economic news out of New Zealand earlier as the country’s trade deficit for October came in smaller-than-expected.  Imports were less-than-expected but it was much larger-than-anticipated exports that helped to bring the deficit down.

Looking ahead to the remainder of the day, the second estimate of UK GDP growth for the third quarter is expected to show the same reading as released in the initial estimate – a quarter-on-quarter expansion of 0.5%.  That was relatively positive as the third quarter was the period immediately following the Brexit referendum.  During the US session it is likely be quiet as many workers also take the Friday following Thanksgiving off.  Inventory data and Markit Services flash PMI could provide some new insights.