Risk sentiment leans positive on Israel-Hamas de-escalation hopes. Pricing geological risk is notoriously hard, expect volatile and wild swings. NZD opens higher

By Stuart Talman, XE currency strategist

Despite the absence of more positive news flow regarding the Israel-Hamas situation, risk assets have been bid to start the new week, tracking higher as a widely expected escalation is yet to materialise. As Israeli troops continue to mass at strategic points on the Gaza border, the market awaits an inevitable counter-offensive that may draw in direct involvement from Iran and the US. A wider spread regional conflict would be the catalyst for pronounced selling of risk-sensitive assets.

The US dollar is lower against most of its major peers, logging its largest losses against the antipodeans and the Swedish krona.

The New Zealand dollar gapped higher at Monday's open, starting the new week almost 20 pips higher from Friday's close, clearly benefitting from the National Party’s resounding election victory. As is always the case, the immediate reaction to the election result will fail to evolve into a longer-term trend as domestic politics takes a back seat to global factors and narratives, including the path for inflation, China's growth outlook, Fed policy, global bond yields and geopolitics.

Opening a few pips north of 0.5910, the Kiwi consolidated its gains, trading within a tight range throughout Monday's sessions. Having found support around 0.59, NZDUSD commences Tuesday's local session near 0.5930.

On the downside, a support zone presents between 0.5860/80 with both Friday's low and the 05 September year-to-date low located within. Should sentiment continue to deteriorate if the Israel-Hamas conflict intensifies and spreads, expect another deleveraging wave to drive risk assets lower leading to sub-0.58 levels for the Kiwi.

Should diplomatic efforts prove successful in containing the conflict, a sharp risk rally would ensue, driving NZDUSD back through 60 US cents and beyond.

Fear and uncertainty levels are spiking, therefore expect heightened volatility and outsized swings in either direction.

Looking to the day ahead, geopolitical headlines are likely to remain the most important influence on short term direction.

That being said, it is a busy 24 hours, the economic calendar presenting multiple tier 1 macro data releases.

Locally the headline event for the week is the release of 3Q CPI, the consensus calling for annualised headline inflation to ease from 6% to 5.9%. Within the report, the non-tradeables inflation is an important component given it represents domestic price pressures. For the June quarter, non-tradeables inflation printed at 6.6%, down from a 20 year high of 6.8% the prior quarter. Should this data point fail to meaningfully recede over the final two quarters of 2023, the RBNZ may be compelled to resume its hiking cycle in early 2024. 

Regionally, the focus will also be on RBA meeting minutes, although these are unlikely to deliver any surprises given the statement from the September meeting was a carbon copy of August's.

Offshore UK wages, Canadian CPI and retail sales for the US present as volatility inducing events. There are also a number of central bank speakers scheduled.

We'll refrain from making a short-term directional call given this largely depends on developments in Israel and Gaza which are highly unpredictable and volatile.

We do hope that the Kiwi can track decisively higher through 60 US cents as the likely catalyst would be a lack of conflict escalation in the Middle East.

Stuart Talman is Director of Sales at XE. You can contact him here.