Geopolitical Tensions as Oil Prices Stay Steady & RBNZ Being on a Data Dependent Regime

The US Dollar’s Steady Climb as Global Markets Find Their Footing

By August 2024, the US dollar has proven to be impressively resilient as global financial markets start to settle down after a bumpy ride. This newfound calm is rippling through currency markets worldwide, influencing both established and emerging market currencies. The dollar remains strong, thanks to the solid foundation of the US economy—think robust job growth, steady consumer spending, and inflation rates that, while still high, are finally showing signs of cooling off.

One of the big stories lately has been the slide of the Japanese yen, with the USD/JPY exchange rate inching closer to 148.00. This dip can be chalked up to a mix of factors, both local and global. Japan’s central bank, the Bank of Japan (BoJ), has stuck to its ultra-loose monetary policy, keeping interest rates low. This decision has widened the gap between US and Japanese interest rates, making the yen less attractive to international investors.

On the flip side, Japanese stock markets have seen a strong comeback. The Nikkei 225 index bounced back sharply after a rough patch the week before. This recovery is largely thanks to a more optimistic outlook among global investors, as fears of a worldwide recession have eased a bit. The rally in Japanese stocks shows growing confidence in the strength of Japanese companies, especially in sectors like technology and manufacturing that are thriving on continued global demand.

Commodity Currencies on the Rise and a Shift Away from Safe Havens

Currencies tied to commodities, like the New Zealand dollar (NZD), Norwegian krone (NOK), and Australian dollar (AUD), have been doing well in this more positive risk environment. These currencies are benefiting from rising commodity prices, especially in energy and metals, as well as upbeat economic news from their home countries. The Australian dollar has picked up steam as China’s economic indicators start to stabilize—a big plus for Australia’s export-driven economy.

In contrast, traditional safe-haven currencies such as the Japanese yen and Swiss franc (CHF) have lost some of their shine. This trend reflects a broader move by investors toward riskier assets, as immediate fears of a global economic downturn have receded. As a result, many are shifting their investments away from safer bets like these currencies and into equities, emerging market assets, and commodity-linked currencies.

Geopolitical Tensions and Steady Oil Prices

Despite ongoing geopolitical tensions in the Middle East—especially the potential conflict between Iran and Israel—the oil market has held steady, with prices staying above USD 80 per barrel. This stability is due to a few key factors:

Increased Global Supply: Major oil producers, including OPEC+, have kept production levels consistent, ensuring there’s enough supply to go around.Strategic Reserves: Countries like the United States have tapped into their strategic reserves to cushion any potential shortages.Cautious Optimism: There’s a hopeful feeling that a full-blown conflict can be avoided. And even if tensions do flare up, the immediate impact on oil supply might be limited.That said, the situation remains unpredictable. Any significant escalation could shake up oil supplies, leading to sharp price hikes and a return of risk-averse behaviour in the markets.

What’s Next for the New Zealand Dollar and Central Bank Moves

Looking ahead, the New Zealand dollar could face some downward pressure. The Reserve Bank of New Zealand (RBNZ) seems likely to take a more cautious approach, with some experts predicting that the central bank might start cutting rates sooner than expected. This potential shift is driven by weaker growth and inflation in New Zealand, where the economy is grappling with issues like lower consumer spending, declining business confidence, and reduced export demand. If the RBNZ does lean more dovish, the NZD could take a hit, especially if global risk appetite wanes.

The British Pound’s Comeback and the UK’s Economic Outlook

The British pound has made a solid comeback, boosted by a positive labour market report from the UK. The report highlighted strong job growth and rising wages, easing expectations for immediate rate cuts by the Bank of England (BoE). The pound’s recent gains reflect a broader sense of stability in the markets, helping it regain ground against the US dollar.

As for the UK’s economic outlook, it’s cautiously optimistic. The BoE is likely to take a wait-and-see approach before making any big moves, but challenges remain—especially when it comes to the ongoing cost-of-living crisis and the uncertainties surrounding Brexit-related trade deals.

Overall, the US dollar’s outlook remains bright, supported by a calmer market environment and the relative strength of the US economy. However, geopolitical risks, particularly in the Middle East, and changes in global central bank policies will continue to play a big role in currency movements over the coming weeks. Investors should stay on their toes, as major developments in these areas could lead to sudden shifts in market sentiment and currency values.

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