FX market outlook

FX market outlook

Markets largely unfazed by US government shutdown; German politics in focus

Here are the latest developments in global markets:

• FOREX: The US dollar index opened with a small negative gap on Monday after news that the US government shut down on Friday, but managed to recover its losses to trade marginally higher in the following hours.
• STOCKS: Japanese markets were in the green today, albeit not by much. The Nikkei 225 and the Topix indices closed up by 0.03% and 0.1% respectively. In Hong Kong, the Hang Seng is 0.4% higher, rising to a fresh record high, while in Europe, futures tracking the Euro Stoxx 50 suggest the index could open slightly higher. In the US, the S&P 500 and Nasdaq Composite indices closed at yet another record high on Friday, with US equity investors appearing unfazed by the threat of a government shutdown. The Dow Jones was up 0.2%, closing just shy of its all-time highs as well. That said, futures tracking the Dow, S&P and Nasdaq 100 are all in negative territory at the time of writing.
• COMMODITIES: Energy prices traded somewhat higher, with WTI and Brent crude being up 0.1% and 0.3% respectively. The positive reaction may be owed to some remarks by Saudi Arabia’s energy minister on Sunday, who hinted that there is a consensus among major oil producers to continue with their supply curbs even beyond 2018, when the current production-cut deal expires. In precious metals, gold was down nearly 0.1%, last trading near the $1330 per ounce territory.

Major movers: US government shuts down while Germany moves closer to forming a government

In the US, a government shutdown began on Friday, after lawmakers in the Senate failed to reach an agreement on a deal to fund government expenses, amid major disagreements on immigration and border security. The greenback opened with small negative gaps against its major counterparts, but the weakness was not sustained, with the dollar index managing to claw back its losses and even trade slightly higher in the following hours.

Combined with the fact that major US equity indices closed at new record highs on Friday, the subdued market reaction suggest investors are not particularly worried by the government shutdown. It appears the market expects this situation to be resolved fairly quickly, before it has any material impact on the economy or business sentiment. In this respect, the Senate is expected to vote again today on whether to pass a bill that would fund the government until early February.

Encouraging political developments in Germany during the weekend helped euro pairs to open with positive gaps this week, though the moves were short-lived, with euro/dollar and other euro crosses giving back their gains in the following hours. The Social Democrats (SPD) voted in favor of pursuing coalition talks with Merkel’s conservatives, opening the door for a new stable and pro-EU government in Germany after several months of uncertainty. Although there are still many hurdles to be resolved until a deal is finalized, this is still seen as a significant step towards an accord, which helps to explain the positive reaction in the euro. The single currency could enjoy some support from this positive sentiment, but its broader direction will likely be dictated by the ECB policy decision on Thursday. Markets are likely to focus on whether President Draghi will echo recent remarks of his colleagues and express discomfort with the recent appreciation in the euro.

Elsewhere, the yen was somewhat softer against both the euro and the dollar. The Bank of Japan (BoJ) is due to announce its policy decision tomorrow, and while there are no expectations for any change in policy, traders will be watching Governor Kuroda’s press conference closely for any signals on the future direction of policy. Given recent chatter that the BoJ is slowly heading for the stimulus-exit door, Kuroda may take the opportunity to push back against such speculation, reiterating his dovish remarks after the December gathering.

Day ahead: US and German politics gathering attention

In the absence of major data releases and amid the federal government shutdown, politics are in the forefront in the US. Market participants will be closely monitoring the situation with a vote to fund government operations through February 8 set to take place at 1700 GMT; the longer the stalemate remains in place, the more likely the US currency will come under pressure.

Political developments are in focus in Germany as well after the Social Democrats supported entering coalition talks to form a government with Chancellor Merkel’s conservative bloc. Eurozone’s common currency could receive a boost should positive momentum be maintained.

Canada will see the release of figures on November wholesale trade at 1330 GMT; the numbers are not expected to move markets.

ECB President Mario Draghi and executive board member Benoit Coeure will be participating in a Eurogroup meeting taking place today.

The earnings season continues with Netflix releasing quarterly results after Monday’s US market close.

The global elite will tomorrow be attending the World Economic Forum at Davos, Switzerland.