FX market outlook

FX market outlook

Dollar steadies lower as yen gains on risk aversion.

The US dollar traded mostly sideways during today’s Asian session after reversing the sharp gains of the previous day on worries that the new US administration’s policies on immigration and trade could create uncertainty.

Mainly benefitting from the US currency’s weakness was the Japanese yen, as dollar / yen dropped below 114 to 113.60.  Dollar / yen was still about a yen away from the previous week’s 112.52 2-month low.  Euro / dollar was trying to climb back above 1.07 once again by trading at its session highs of 1.0715.  German retail sales for December came in worse-than-expected but that did not appear to hurt the euro.

The dollar and risk assets came under pressure after the acting US Attorney General chose to defy Trump’s executive order to ban immigration from 7 mainly Muslim countries and was promptly sacked by the President.  This was interpreted as a sign that Trump’s trade and immigration policies could create a backlash both in the US and abroad as there was widespread criticism of his decision both inside the US as well as by a number of world leaders.

Sterling was unable to capitalize on the greenback’s weakness as an attempt to rise for dollar / pound to rise above 1.25 was not sustained and the pair traded at 1.2487.  The bill that would allow the UK government to trigger Article 50 for an exit from the EU was going to start to be debated in the parliament today.

A Bank of Japan meeting and the press conference by its Governor Haruhiko Kuroda yielded little in the way of changes in policy or views, with the exception of a slightly firmer growth forecast and an extension of a loan program for industries with potential.  The Bank would remain accommodative as long as inflation was below its 2% target, according to Kuroda, although the pace of asset purchases was expected to remain steady.

In the day’s economic data, a raft of Japanese economic data for December such as household spending, jobs / applicants ratio, unemployment and industrial production were mostly on the positive side.  In Australia, NAB Business Confidence for December was slightly better-than-expected.  The aussie was mostly stable around 0.7554 against the dollar.

Looking ahead, the focus of attention will be on the Eurozone, as flash inflation for January will be released.  The unemployment for the region was expected to remain at 9.8%.  During the US session, Canadian GDP for November and the Conference Board’s consumer confidence for January out of the United States will be the most important indicators.  The US employment cost index and the Chicago PMI will also be watched.