Macroscope | From US to China, Britain to Argentina, geopolitics are roiling markets, starting with currencies

The US dollar, Chinese yuan, British pound and Argentine peso have been quick to feed geopolitical tensions into wider markets. As political dramas unfold, fast-moving currency markets will continue to release value for shrewd investors

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A woman walks past a money exchange shop in Hong Kong on August 6. Liquid markets and round-the-clock pricing mean foreign exchange markets often have time to react before political developments can be fully reflected in other assets. Photo: AP

Published: 3:00am, 7 Sep 2019Updated: 4:37am, 7 Sep 2019

Geopolitics might as well be the theme of the year. United States-China. Brexit. Argentina. Italy. South Korea-Japan. US-Iran. Hong Kong. Each of these geopolitical flashpoints has roiled markets in recent months. New headlines invariably result in local equity market sell-offs and rallies in high-quality fixed income.

Currencies are often the biggest movers; liquid markets and round-the-clock pricing mean foreign exchange markets often have time to react before political developments can be fully reflected in other assets.

In fact, currencies are the common thread tying these geopolitical issues to markets. The drivers of the US dollar’s ascent are inseparable from politics.

The dollar’s valuation is a result of both the relatively higher real rates available in the US among top-rated sovereign debt as the Federal Reserve tries to manage the economy, and of the more defensive nature of US asset markets attracting investors seeking certainty – which have reverberated through other currencies too.

British domestic politics have been the primary mover of sterling in recent months. Continued delays in the Brexit process, the prospect of new elections, the increasing possibility of a disorderly no-deal Brexit, and the resulting uncertainty dragging on the British economy have all pushed the pound down by roughly 4 per cent in the year to date.