Daily Forex Outlook: What you need to know for Tuesday

The USD and EUR were the main beneficiaries from Monday's flows, commodity currencies (AUD, CAD) finished up sharply lower, while JPY continued to weaken for the 2nd day in a row after no further missile launch tests by North Korea. Gold was also sold hard, coming into close contact with $1,300.00 again, while the GBP finally saw some much-needed profit-taking after Carney's IMF speech. 

The day offered a scarcity of new information on the fundamental front, other than the reaffirmation of steady inflation readings out of the Eurozone, while we await additional clues with the release of the German ZEW economic sentiment on Tuesday; it must be noted that after four consecutive months of declines, the indicator is set to improve from its prior figure, potentially acting as a factor that may support the EUR on the lead-up to the event. In the US, we will also see a collection of 2nd tier data points in housing and import prices. 

Back to the action seen on Monday, market participants tackled the new week with a firm interest to bid up the US Dollar, as the 2-day FOMC meeting gets underway this Tuesday; since the surprising move by the BoE to telegraph a possible rate hike in Oct/Nov, the market may have a reasonable degree of well-justified fears that the FOMC may follow suit with a disruptive hawkish surprise. There is no denying that a certain sense of a global concerted effort by global Central Banks seems underway, aimed at initiating a much-needed tightening cycle; amid such backdrop, it is therefore understandable that market participants found value in buying what still appears to be fairly cheap US Dollars. What's more, a renewed focus on US tax reform and less aggressive rhetoric on North Korea seem to have played in favour of the US Dollar too. 

As per GBP, after an unsustainable rise of more than 400 pips in just 2 days, Monday was time for buyers to collect some juicy profits after successive failures to break through the 1.36 handle. Carney's IMF speech, in which he failed to add further substance to the rate hike case by noting that any tightening must be gradual and limited, was the type of rhetoric falling short to find new GBP buyers; instead, it was interpreted as a reasonable excuse to offload GBPs, with the upcoming FOMC meeting helping the case to lighten up overly long positions, resulting in the pair setting a low for the day at 1.3465 before a shallow bounce. There will be no fundamental releases of note out of the UK on Tuesday, which makes Wed's UK retail sales and the FOMC meeting later that same day the next main catalysts.

With regards to the Japanese Yen, a common pattern was yet again seen, with tepid weekend hedges removed after no new missile launches by North Korea over the weekend; the absence of any further escalation led to 'risk on' flows making its way back in detriment of the Japanese currency, that ends the day near its lowest quotes vs USD circa 111.55. The pair will garner a great deal of attention this week, as both the Fed and BoJ meet to update us all on their latest policy stance. As a spoiler, judging by the dull and repetitive uneventful outcomes by the BOJ (no risk of exiting QQE or YCC this year), it seems safe to assume that if any Central Bank may act as a volatility catalyst, that has got to definitely be the Fed (possible departure of Yellen next year a reason to speed up rate hikes?). The rising prices in both US stocks and US yields underpinned the bids in USD/JPY, with the former reaching yet another milestone by breaking 2,500 points, a new all-time high. The Nikkei futures also broke out the 20k mark, so the index will be one asset class to watch in the next Asian session as well. 

As per the commodity currencies, the Australian Dollar was pressured throughout the day, with an early Asian test of 0.8030s failing miserably (the RBA remains concerned above the 0.80), only to begin a steady decline well passed the pair's ATR-14 period. The exchange rate ends the day at 0.7960 vs the USD. One one hand, the AUD felt the heaviness of falling metal prices (both Iron ore and Copper suffering significant losses), while broad-based USD strength contributed greatly to inflict further damage. In a few hours, the RBA minutes is due and expectations are for a hawkish rhetoric, which makes the current rate a fairly attractive proposition for those short-term traders aiming to pick up some relatively cheap AUDs. 

A major sell-off hit the Loonie on Monday, courtesy of BoC Deputy Governor Tim Lane's comments before the Saskatoon Regional Economic Development Authority. In his prepared remarks, Lane said they are paying close attention to the impact of a stronger Canadian Dollar; the headline was interpreted as a clear attempt to talk down what they may perceive as a too rapid appreciation of the local currency in recent weeks. Other remarks made by Lane reinforced the notion that a more cautious stance on monetary policy by the BoC might not be ruled out, if only temporarily. The successful jawboning took the rate over 100 pips higher, ending the day just below 1.23. Manufacturing sales out of Canada this Tuesday is the next fundamental event to focus on. 

Another asset class that must be monitored closely is gold, re-approaching the area of $1,300.00 after being sold hard on Monday, as the risk appetite forced leveraged longs to run for the exits. That said, the precious metal remains highly susceptible to further developments in the Korean peninsula, with the situation being extremely fluid, and as such, still possing enormous upside risks in days and weeks ahead. With diplomatic efforts between the US and North Korea almost, if not fully exhausted, the prospects for an easing of the ongoing tensions remains a very distant option. There has been growing chatter that North Korea is preparing for another missile launch this week. If confirmed, and depending on the US/Japan/South Korean reaction, Gold and Yen are set for wild rides again.