FX markets face a busy week full of central bank meetings, data releases and politics. With energy prices firm and expectations growing that the US and Israel will launch another attack on Iran, we expect central banks to stay hawkish. This should keep the dollar supported on dips. Expect Brazilian assets to sell off today on President Lula’s surprise win
USD: Geopolitical Environment Remains Dollar Positive
The dollar is starting a busy week relatively supported. It is a week that includes key events such as Wednesday’s FOMC meeting, third-quarter earnings from big tech companies and geopolitical events, including tomorrow’s elections in Israel. There are also a whole host of central bank meetings across G10 currencies, including those in the eurozone, Japan, Canada and New Zealand.
The balance of risks suggests that the dollar can probably hold onto its gains. Yes, interest rate spreads have moved a little against the dollar as the recent US tech wobble has pared back Federal Reserve tightening expectations. But energy prices remain at their highs, and the arrival of a third US aircraft carrier group in the Gulf makes further escalation in the Middle East more likely than not.
Barring some clearly underwhelming 3Q results from the likes of Alphabet () and Microsoft () on Wednesday, we think higher energy prices and a hawkish Fed can keep the dollar supported this week. That means the can probably stay in a 101.45 to 101.85 range today. We don’t really see the need for it to correct lower to 101.25 unless US tech drags US equities sharply lower.
EUR: Business Sentiment Surprisingly Resilient
Friday’s release of flash October PMIs for the eurozone remained surprisingly resilient and pointed to some decent third-quarter growth figures. The exception was France, however, where weak growth is hardly going to help the country’s fiscal malaise. Separately, OAT-Bund spreads have narrowed this morning after Moody’s maintained France’s Aa3 rating on Friday. This means France retains at least one AA rating. While welcome news in the short term, we will need to see concrete and material progress on the French budget over the coming months to take pressure off the euro. That seems unlikely, and high energy prices are hardly helping.
On the subject of energy, last week’s release of the eurozone current account surplus for August at just €8.7bn (the lowest since the start of 2023) provided a reminder of the toll higher energy prices are taking on the bloc’s external position. This, alongside a U-turn in Fed policy, had contributed to a very weak at the time.
Today’s session is expected to see stable German Ifo business sentiment, where the important expectations component is seen at a healthy level near 90. Any downside surprise here could hit the euro. And while the recent 10bp narrowing in EUR/USD two-year swap differentials might make the case for a slightly higher EUR/USD, we see plenty of justification for a 1-2% risk premium to stay in the euro.
We favour 1.1250/70, capping EUR/USD upside in the near term, and see the 1.1180 support level as vulnerable this week.
BRL: Lula Comes Back From the Brink
In a huge surprise, incumbent Brazilian President Luiz Inácio Lula da Silva has won the presidential election run-off with 51.8% of the vote. This is the first time since 1989 that a second-placed candidate has come from behind to win the run-off. The victory is not without its controversy, however. The opposition candidate, Flavio Bolsonaro, wants the election result annulled since a Supreme Court judge extended polling hours at the last minute. Some polls had already closed, and claims are that the polls that were extended tended to be in Lula’s voting base in the Northeast of the country. Early indications are that key authorities have no interest in re-running the election.
Important for local financial markets will be how quickly Bolsonaro accepts the result – or at least allows the constitution to run its course. That is what his father did 44 hours after losing to Lula in 2022, a move that provided some calm to markets.
For today, however, expect Brazilian markets to be hit hard. gapping 5-7% higher at the open to the 5.20/25 area should be no surprise, while the local looks set for double-digit losses. The moves could turn out to be larger if the external environment deteriorates again and spike. The fiscal side has always been Brazil’s Achilles heel, and a 7-8% budget deficit and 70% net debt-to-GDP ratio leave Brazil vulnerable in a global bond sell-off. Instead of fiscal consolidation under Bolsonaro, Brazilian assets are instead going to have to contend with Lula’s campaign pledges, including a shorter working week.
Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
