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  • richard evans

Elevated risks makes for nervous markets

Good morning

It had looked briefly on Friday morning that the post-US CPI dollar highs had been reversed and that the likes of EURUSD and GBPUSD would be able to push higher. I’d warned Friday morning about the potential for safe-haven USD buying ahead of the weekend and indeed this was one of the rare occasions I can say I was correct, with GBPUSD trading lower from 1.2225 to hit a low of 1.2125, while EURUSD moved lower from 1.0555 to 1.0495.

A lack of major escalation of the Middle East situation has, for the time being seen USD off those highs and as I type GBPUSD is up to 1.2170, EURUSD 1.0535. GBP has lost ground against EUR, GBPEUR now 1.1550. Some reasonably hawkish comments from ECB officials could be the reason for the relative strength of the single currency. Lagarde said Eurozone labour market shows no signs of weakening, while ECBs Nagel made it clear upside risks to inflation remain present and ECB will ensure rates are sufficiently higher for as long as necessary.

The Eurozone is also a happier place this morning as exit polls from the Polish election suggests the pro-Euro Civic Coalition are poised to oust the Law and Justice party. The right-wing party are actually likely to win most seats but it won’t be enough to give them a third term in office. This helps on many fronts. Poland, together with Hungary, have opposed some recent EU declarations so with Poland more on EU’s side things could become easier politically. In addition, Poland is on the border with Russia and the more friendly Poland are, the better, quite frankly. Looks like Poland likes the news, as EURPLN trades down from 4.55 to a low near 4.45, now 4.48. Full results should be out tomorrow morning.

New Zealand elections have also seen a change of leadership, with the Labour party being shunned as voters turn to the National party who are likely to form a coalition with the Act party. It is quite a turnaround for Labour, which in 2020 won a landslide victory, probably seemed like a good idea at the time but meant they had to rule over Covid which clearly wasn’t going to make anyone particularly happy. I do remember people in the UK admiring New Zealand and Australia for their handling of Covid, shutting borders and seeing a relatively low number of cases and deaths. Doesn’t seem like the locals agreed. NZD likes the result, NZDUSD traded up from a close last week of 0.5880 to 0.5930, GBPNZD down from 2.0620 to a low of 2.0505, now 2.0540.

As we are all aware, this latest mild relief in risk is at the mercy of news headlines. Should Israel launch a full-scale ground offensive into Gaza then we’re likely to see further USD buying. While there is a hope some sort of agreement can be made, I believe that Israel will not stop going after Hamas regardless of the impact on regular Palestinians.

We have seen little in the way of safe-haven Yen buying. It was always one of the first to be bought if risk appetite looked to be waning. It doesn’t really happen quite the same now, USDJPY remains in the mid to high 149s, with only the ongoing threat of intervention preventing further rallies.

In sport, well the weekend was a bit of a cracker. Let’s ignore England’s small victory against Australia in the football and we’ll certainly ignore England’s dismal performance in the cricket against Bangladesh. Let’s instead focus on the rugby. England overcame Fiji to make the semi-finals. It was a game that England seemed to have under control, until Fiji got a couple of late tries. We held out. The other matches didn’t disappoint either. Wales were beaten by Argentina, New Zealand proved once again that you should never write them off in rugby as they beat world number one Ireland, while perhaps the match of the tournament so far was France v South Africa which saw hosts France lose out by one point after a real thriller. Argentina now face New Zealand, England take on South Africa. Sensible money is on a NZ/SA final but I think Argentina at 10-1 to bear the Kiwis could be worth a small punt.

Finally, for the first time in many months, it is properly cold. The lawn was white with frost and the heating is on. Mind you, I still prefer that to the rain we are forecast to get for the next ten days or so. Make the most of today and tomorrow.

- 09.30 BoEs Pill speaks

- 13.30 US NY empire state manufacturing survey

- 21.30 Feds Harker speaks

- 22.45 NZ CPI

- 01.30 RBA minutes

- 07.00 UK average earnings

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