Financial markets continue to weigh up geopolitical risks

USD: Geopolitical risks & Fed rhetoric remain in focus

The major foreign exchange rates have remained relatively stable at the start of this week as market participants continue to closely monitor the latest developments in the conflict between Hamas and Israel. The dollar index has been consolidating at just below the year to date high from earlier this month that was set at 107.35. The release at the end of last week of the stronger than expected US CPI report for September has brought an end to the correction lower for the US dollar that was recorded at the start of this month. The ongoing run of stronger US activity data is continuing to encourage a stronger US dollar in the near-term. As we highlighted in our latest FX Weekly report (click here), the most recent growth forecasts uploaded to Bloomberg for US GDP in Q3 have averaged 3.5% although they then expect growth to slow back to an average of 1.1% in Q4. If growth remains stronger than expected and inflation fails to slow further, then one final Fed hike still can’t be ruled out. In light of these developments, market participants will be listening closely to comments from New York Fed President Williams (Tuesday) and Fed Chair Powell (Thursday) who are both scheduled to speak at the Economic Club of New York. Fed speakers over the past week appear to have pushed back against higher rates. US rate market participants have bought into that view by scaling back expectations for another 25bps hike, and there is currently only 2bps of hikes priced in for the November FOMC meeting and 8bps for the December FOMC meeting.  If a similar message is delivered by Fed Chair Powell and New York Fed President Williams this week that higher market rates if sustained have tightened US financial conditions significantly, it will make market participants more comfortable that the Fed is on hold now which is helping to prevent an even stronger US dollar.

In the oil market, the price of Brent has continued to trade at higher levels after climbing back above USD90/barrel at the end of last week. It highlights that market participants are continuing to price in a higher geopolitical risk premium to reflect the ongoing conflict between Hamas and Israel. Bloomberg reported over the weekend that the US has been ratcheting up efforts to prevent the war from engulfing the wider region. According to the report, the US has held back-channel talks with Iran in recent days to warn the country against escalation. White House Security Advisor Jake Sullivan stated over the weekend that the US couldn’t rule out Iran intervening either directly or via Hezbollah. The US has reportedly asked Qatar to relay a warning as well to Hezbollah not to open up a second front to the war in the country’s north. Regional governments are reportedly uniting to try to stop the spreading of the conflict. The Israel army is currently poised to stage a large scale ground offensive in Gaza which is expected to provide the next flash point. The relatively muted financial market response over the past week suggests that the market participants are expecting the conflict to remain contained which would be less disruptive outcome.

 

LEVERAGED FUNDS FLIP TO USD LONGS

Source: Bloomberg, Macrobond 

PLN: Poland’s relations with EU set to improve providing boost for zloty

The biggest mover in the FX market at the start of this week has been the Polish zloty. It has increased by just over 1.5% against both the euro and the US dollar. The main trigger was the favourable election outcome over the weekend in Poland. According to exit polling, and a partial vote count, the opposition parties are on course to win back power and deny the ruling nationalists a third term in what is the best case scenario for financial markets. The main opposition party, the Civic Platform, have reportedly won 31% of the vote according to a projection from Ipsos which along with the Third Way alliance winning 14% of the vote, and the Left party winning 8.6% of the vote will give the opposition parties a majority of 248 seats in the 460 seats lower house of parliament. While the Law & Justice Party still will won the largest share of the votes at 37%, it will not be able to win a majority of seats as the far-right Confederation party won only 6.4% of the vote.

The ousting of the nationalists will help to restore damaged relations with the EU. The Civic Platform is led by Donald Tusk who was the former European council President. He has already pledged to normalize Poland’s relationship with the EU and to secure the release of more than EUR35 billion in funding that was withheld to punish the Law & Justice government for curbing the independence of judges during their eight year rule. His first move will be to restore the impartiality of the public broadcaster. The zloty should continue to strengthen further in the near-term in anticipation of improving relations with the EU that will help to support growth and attract capital inflows.  

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
UK	09:30	BoE MPC Member Pill Speaks	--	--	--	!!
EC	10:00	Trade Balance	Aug	--	6.5B	!!
US	15:30	FOMC Member Harker Speaks	--	--	--	!!

Source: Bloomberg