Written by Steven Dooley, Head of Market Insights
Global overview
Geopolitical risk continues to drive global markets lower. The Australian and New Zealand dollars remain at or near 11-month lows. This week, Australian inflation, and meetings from the BoC and ECB, are the major events.
US shares ended week lower
Global markets finished last week lower as worries about rising geopolitical tensions and higher bond yields hit global sentiment.
US shares were down sharply with the S&P 500 down 1.3% while the Nasdaq dropped 1.5%.
In FX markets, safe havens like the US dollar and Swiss franc remain broadly in favour although the USD index has been mostly steady rather than necessarily higher.
Around the region, the AUD/USD fell 0.2% as it neared 11-month lows.
The NZD/USD fell 0.3% as it hit the lowest level since November.
The USD/SGD fell 0.1% while the USD/CNH was flat.
Asian FX pressured
The USD/JPY is back near 11-month highs due mainly to the stronger US dollar. We continue to be slightly bearish on the JPY and believe that USD/JPY rate differentials will continue to favour the US dollar until at least Q1 2024.
Although the exact effect of geopolitical risk on the Japanese yen is uncertain, there is a potential negative risk for the JPY. Because of Japan’s reliance on Middle Eastern oil supplies and the government’s preference for fiscal subsidies over monetary tightening as a response to rising import costs, the market may discount the risk of a rise in Middle Eastern oil prices driving Japanese inflation higher.
In other parts of Asia, against a backdrop of rising US rates, emerging market central banks have discovered that being too dovish too fast has caused double whammy on their currencies, forcing their currencies lower.
Apart from Indonesia, most Asian nations choose to engage either in action or vocal intervention in the foreign exchange market, whilst central banks in other areas opted to become less dovish. As such, pairs like USDCNH, USDJPY, and USDKRW have yet to break past their recent highs.
BoC, ECB to meet
Looking to the week ahead, apart from rising geopolitical risk, persistent inflation and central banks’ attempt to manage this remains the major driver of markets.
In Australia, Wednesday’s September-quarter inflation reading is key with the new Reserve Bank of Australia governor Michele Bullock last week signaling that a hike in November is possible. A lower reading could drive the AUD sharply lower.
From central banks, the Bank of Canada meets Wednesday night while the European Central Bank decision is due on Thursday night.
Aussie, kiwi stuck at lows
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 23 – 28 October
All times AEDT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
