Middle East geopolitical risk helps USD to rebound

USD 1: Safe haven currencies boosted by Middle East geopolitical tensions

The US dollar has strengthened at the start of this week alongside the other traditional safe haven currencies of the Swiss franc and yen, although the negative spill-over impact on the foreign exchange market from the flare up in geopolitical tensions in the Middle East over the weekend has been relatively modest so far. It has helped the US dollar index to rebound after it fell back towards the 106.00-level on Friday as it moved further below last week’s high of 107.35. The main market impact from the renewed conflict between Hamas and Israel over the Gaza strip has been in the oil market where the price of Brent rose back up to USD89/barrel overnight up from a low on Friday of 83.44/barrel. It follows a heavy sell-off at the start of this month after the price of Brent peaked at USD97.69/barrel on 28^th September. Foreign market participants will now be watching closely to see if the oil market continues to move to price in a higher geopolitical risk premium to reflect the risk that regional tensions could escalate further and prove more disruptive for global oil supply. Our oil analyst sees no immediate impact to current global oil production with there unlikely to be any immediate large effect on the near-term supply-demand balance and inventories in the oil market.

However, he does note that developments are bullish for the price of oil for two main reasons. Firstly, he now believes that there is a reduced likelihood of relations normalizing between Saudi Arabia and Israel that could have helped encourage a potential boost to Saudi oil production early next year . Secondly, he believes that even if Israel does not immediately respond to Iran, the repercussions will likely affect Iran’s oil production. Developments over the weekend could now prompt the US to more strictly enforce sanctions on Iran’s oil exports. Iran’s oil production has increased sharply to 700k barrels/day which the is the second largest source of incremental supply in 2023. On balance, we believe the developments are supportive for the US dollar in the near-term although the conflict would have to escalate further to have a bigger impact on the foreign exchange market.               

US EMPLOYMENT HAS SLOWED BUT LESS SO RECENTLY

Source: Bloomberg, Macrobond & MUFG GMR

USD 2: NFP report highlights that a lot of good news is already priced in now

Prior to developments over the weekend, the dollar had been correcting modestly lower after the dollar index closed lower for the fourth consecutive day on Friday. It has brought an end to the run of eleven consecutive weeks of gains for the dollar index. Even the release of the much stronger than expected non-farm payrolls report on Friday was unable to inject fresh upward momentum into the US dollar. The price action suggests that the US dollar’s strong upward trend since mid-July is starting to show more signs of exhaustion after upward momentum measures have reached stretched levels.

The release of the non-farm payrolls report for September revealed further evidence that the US labour market remains resilient. It is less clear now that employment growth has slowed as much this year. After including the upward revisions to prior months, employment growth has averaged 266k/month over the last three months which is roughly the same as the year to date average 260k/month. Those headline figures have been flattered somewhat by large monthly increases in government sector jobs over the last three months totalling 214k. Private sector job growth has been running at around 195k/month and 184k/month over the last three and six months on average. It compares to an average in the second half of last year of 317k/month. One part of the report that remains more reassuring for the Fed is slowing pace of average hourly earnings which increased by 0.2%M/M in September. The second consecutive softer monthly reading. Stronger employment growth though will keep alive expectations for one final hike from the Fed later this year. The next important release for the Fed ahead of 7^th November FOMC meeting will be the latest US CPI report on Thursday. If the report continues to show further evidence of slowing core inflation, it will support our call for the Fed to keep rates on hold and make it harder for the US dollar to regain upward momentum in the week ahead.     

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	09:00	ECB's De Guindos Speaks	--	--	--	!!
EC	09:30	Sentix Investor Confidence	Oct	-24.0	-21.5	!
EC	10:15	ECB's Enria Speaks	--	--	--	!!
US	14:00	Fed Logan Speaks	--	--	--	!
US	15:00	CB Employment Trends Index	Sep	--	113.02	!
US	18:30	Fed Governor Jefferson Speaks	--	--	--	!
UK	21:00	BoE MPC Member Mann	--	--	--	!!

 

Source: Bloomberg