A risky ‘risk-on’
The theme of this week is undoubtedly the risk-on rally caused by reported progress on a Russia-Ukraine peace deal. As always with market moves driven by this topic, the details are opaque and at a time where progress is claimed, bombs continue to fall on Kyiv. Optimism comes from speculation that Ukrainian President Zelenskyy may travel to Washington as soon as this week to discuss a peace deal with President Trump. This follows reports of progress following recent talks in Geneva and supposed ‘secret’ talks in Abu Dhabi. It is reported that this progress in turn comes from a reported change of heart from the White House where a potential deal seems less likely to force Ukraine into accepting large losses of territory.
Any deviations from the current tone of cautious optimism may result in rapid market moves. Any volatility falling out of such a shift in sentiment may be amplified by the presence of a US bank holiday on Thursday for Thanksgiving. It is not just a weaker Dollar that is reflecting the emergence of a risk-on environment. Elsewhere we see the softness that is emerging in energy prices as a symptom of the market’s current wave of optimism for a peace deal. In addition, the rotation towards central and Eastern European (CEE) FX and out of the Swiss Franc is prominent.
The Dollar entered this week already with some downside momentum caused by comments from New York Fed President John Williams suggesting there remains a strong prospect of a rate cut in December. Combined with a building risk appetite and demand for CEE FX, EURUSD should be able to retain its 1.15 handle this week. As well as market sentiment driven by headlines regarding the Russia-Ukraine peace talks, the publication of the Fed’s beige book tomorrow will be a key risk to the Dollar. This publication, released eight times a year, is intended to provide a timely and less rigid view of the US economy in the eyes of monetary policy officials. If this publication portrays a more dovish stance than has been presented by the FOMC at its recent press conferences/decisions, the Dollar will continue to lack support.
Discussion and Analysis by Charles Porter
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