Markets unwind weekend geopolitical hedges

Headlines

* Israel denies ceasefire plans after Iran said Hamas willing to release hostages if airstrikes stop

* Gold slips but holds above $1900 pivot on Middle East conflict

* Stocks rise amid efforts to stifle Israel war ahead of busy week of earnings

* Oil falls below $90 a barrel on report of US-Venezuela deal

* Business outlook in Canada drops to lowest since Covid shock

FX: USD turned lower as risk sentiment bounced back to kick off another busy week. Tensions in the Middle East eased slightly curbing safe-haven demand for the dollar. Data includes US retail sales later today while a host of Fed speakers are scheduled. The highlight should be Chair Powell‘s speech on Thursday ahead of the blackout period before the early November Fed meeting. Will last week’s hotter-than-expected CPI headline data see a change to the recent more dovish chatter？

EUR nudged higher from the 1.05 area. Minor short-covering demand appeared to be a small driver. High oil prices are a big factor for the single currency. The region is a net importer which means terms of trade shift against the euro. Support is 1.0490, resistance 1.0634/39.

GBP found a bid after two days of aggressive selling late last week. BoE Economist Pill said that sticky UK inflation may need a “persistent response” from monetary policy, suggesting that more tightening may be required. Governor Baily commented Friday that policy tightening decisions are finely balanced. The comments will intensify focus on today‘s UK wage growth and Wednesday’s CPI data. Near-term support sits at 1.2122.

USD/JPY is consolidating just below 150 and supposed big intervention level. The Japan Ministry of Finance said it will take “appropriate action on FX”.

AUD went close to the recent cycle lows around 0.6285/6 on Friday before rebounding yesterday. Thursday‘s jobs data will be a focus. USD/CAD dipped below long-term resistance at 1.3667. CPI data is released today and will further shape expectations for next week’s BoC rate decision. There‘s around a 23% chance of a 25bps hike. This rises to a coin toss by March 2024. NZD outperformed after voters elected a centre-right government in Saturday’s election.

Stocks: US equities closed up on a broad-based rally as risk-off weekend hedges were unwound. The benchmark S&P 500 gained 1.06% to settle at 4374. The tech-dominated Nasdaq finished 1.18% higher at 15,173. The Dow closed up 0.93% at 33,985. The DJIA has risen six out of the past seven days while the other two main indices are up five out of the last seven sessions. All sectors in the S&P500 were in the green, led by consumer discretionary and communication services. Earnings released today include Goldman Sachs, Johnson & Johnson and Lockheed Martin.

Asian futures are pointing higher after the positive day on Wall Street.

Gold gave up some of its 5.5% gains from last week. That had been due to safe haven buying and short covering from speculators. A fall in Treasury yields provided some support too. ETF investors are not yet showing any signs of involvement in the recent rally following 20 consecutive weeks of outflow. The 200-day SMA at $1929 has stalled the rally.

Day Ahead – Data deluge plus geopolitics

We have a slew of data from around the globe to content with today. This includes New Zealand and Canada CPI reports, UK jobs data and US retail sales. There will also be a host of central bank speakers. A number of FOMC officials last week suggested that rising bond yields are doing some of the work for the Fed in fighting inflation. This may lessen the need to more policy tightening.

Money markets currently see a less than a 10% chance of a rate hike next month. This rises to only around a one in three bet in December. We note that the most recent FOMC dot plot expected one more rate rise this year. Middle East developments are also important with any signs of the war spreading being highly negative for risky assets. But the fact nothing too much has changed fundamentally and has not extended into neighbouring countries over the weekend has been taken as a positive sign.

Chart of the Day – NZD/USD holding above 0.59

New ZealandCPI for Q3 is released Tuesday with the annual print seen cooling a touch to 5.9% from 6.0%. The quarterly metric is expected to tick higher to 2.0% from 1.1%. The RBNZ, via forecasts released in August, saw the Q3 y/y rate at 6.0% and the q/q at 2.1%. High fuel prices should be partially offset by lower food prices. But economists still see core inflation and domestic inflation remaining hot.A better-than-expected report will be an issue for the RBNZ. The bank was less hawkish than many forecast at its last meeting.

Fridays sell-off came close to the recent low at 0.5884. The early September bottom was 0.5859 and the early October trough at 0.5871. Prices have bounced modestly above 0.59. Sellers emerged around the 100-day SMA at 0.6054 to act as resistance last Wednesday. The kiwi is a risk-sensitive, cyclical currency so highly tied to the Middle East tensions.