The Middle East war continues to dominate the investment environment. The is firm. Equities are lower. Yields are higher. The disruption of trade through the Strait of Hormuz is forcing oil producers to shut down output due to limited storage capacity. Sulfur and urea supplies are also being disrupted, as is and this is having a knock-on effect on agriculture prices.
Reports suggest the G7 may seek to coordinate a release of strategic reserves, but that is seen as only a temporary reprieve and no substitute for re-opening the Strait of Hormuz. The risk-off mood prevails. Stagflation is the main economic scenario being discussed. Heightened volatility across the capital markets also serves to reduce liquidity.
Prices
G10
• Although the recovered from a three-day low recorded after the weak US jobs report to set a new session high near $1.1620 ahead of the weekend. Still, it did not really prove itself in any technical sense and was unable rise above the previous session’s high (~$1.1650). It was sold to slightly below $1.1510 early today, its lowest level since last November. Since the low was recorded, the euro recovered to almost $1.1575. There are 2.1 bln euros of options at $1.16 that expire today.
• The dollar tested but did not record a new session low against the after the US jobs report before the weekend (~JPY157.40). It quickly recovered to test but not make a new session high (`JPY158.10). Follow-through buying today lifted the greenback to almost JPY159, its best level since the Fed/US Treasury checked reportedly checked on prices on January 23. The high for the year was recorded on January 14 near JPY159.45.
• ’s price action was more impressive. Session lows were recorded before the US employment data and it choppily rose to a three-day high, near $1.3410 before making a marginal new high in the NY afternoon. It was sold to a four-day low near $1.3285 today before recovering to around $1.3375. It must move above last Tuesday’s high (~$1.3425) to improve the technical tone. In lieu of that, consolidation is the likely feature.
• After repeatedly trying in vain to establish a foothold above CAD1.37, the market appeared to give ahead of the weekend. The dollar fell to its lowest level against the in a little more than three weeks (~CAD1.3565). It barely poked above CAD1.3600 today, where options for $650 mln expire today, before being sold through chart support around CAD1.3545 in Europe. Last month’s low was almost CAD1.35. The January low was closer to CAD1.3480.
• The quickly recovered from session lows recorded after the US jobs data before the weekend. It bounced from slightly below $0.6980 and approached resistance near $0.7050 before stalling. While helpful, the price action likely changed few minds. It was initially sold to a four-day low near $0.6955 before rebounding back above $0.7000, where options for almost A$1.2 bln expire today.
EM
• The risk-off environment kept the pressure on the . It settled at its lowest level since January 13. Follow-through selling today pushed the peso to a two-month low. The greenback traded a little above MXN18.02 today before sellers emerged and drove it to almost MXN17.87 in the European morning. Support is seen near MXN17.80.
• The dollar traded in the narrowest range against the before the weekend (~CNH6.8890-CNH6.92). It reached CNH6.9340 today but remained in the range set last Tuesday (~CNH6.8750-CNH6.9435). The PBOC set the dollar’s reference rate at CNY6.9158 today (compared with CNY6.9236 last Monday and CNY6.9025 at the end of last week).
• Intervention by the Reserve Bank of India was unable to prevent the from falling to and settling at record-lows. The dollar reached INR92.36 today. News reports suggested that the intervention was not very aggressive.
Other Markets
• The sharp sell-off in equities continues today. Several large Asia Pacific bourses, including the Nikkei, Kospi, Taiex were off 4-5%. Chinese equities fared better, with the CSI 300 losing slightly less than 1%. The MSCI Asia Pacific Index fell nearly 6.4% last week. Europe’s Stoxx 600 was off almost 5.6% last week and is down around 1.5% today. US index futures are off around 1% after dropping 1.2%-3.0% last week.
• The jump in yields also continues today. European benchmark yields are mostly 5-7 bp higher, but the exceptions are notable. The 10-year Gilt yield is up 11 bp to almost 4.75%, while the German Bund and the Switzerland’s 10-year yields are up 2-3 bp. Peripheral premiums are widening as is often the case in a rising rate environment. The 10-year US Treasury yield is up three basis points to 4.17%.
• continues to struggle. It has traded on both sides last Friday’s range. It settled near $5172 yesterday and is near $5110 now. Silver also is recording an outside day. It briefly traded below $80 and recovered to slightly above $84.
• April settled a little above $90 before the weekend and raced to nearly $119.50 before reports of a G7 call shortly to discuss a coordinated release of government oil reserves. It fell to almost $96 before recovering back above $100.
Data
• The US data focus shifts to inflation this week, but today’s NY Fed Feb survey will not capture the market’s imagination ahead of Wednesday’s February (expected 2.4% headline and core) and Friday’s January deflator (expected 2.9% and 3.0%, respectively).
• Mexico reports February CPI today. The headline rate may firm closer to the top of the 2-4% range, while will remain above 4% as it has since last May. The central bank meets on March 26 and is widely understood to be on hold.
• Germany reported a dramatic 11.1% drop in January factory orders (-4.3% projected by the medina in Bloomberg’s survey) factory orders after the heady 6.4% surge in December (initially 7.8%). January industrial output fell by 0.5% (the median in Bloomberg’s survey was for a 1.0% increase). December’s 1.9% decline was revised to -1.0%.
• In the first of five state elections in Germany this year, the Greens won in Baden Wurttemberg yesterday with nearly a third of the vote. CDU came in second with a little less than 30% of the vote. The AfD garnered about 18% of the vote. The CDU rules out governing with them, so another Green-CDU coalition government is likely. The Social Democrats barely made the threshold for representation with a historic low 5.5%. The FDP and Left (Linke) failed to meet the threshold.
• Japan reported the first rise in January real wages since the end of 2024, and the 1.4% year-over-year increase matches the strongest increase since May 2021. This will likely help underpin consumption. Household spending is due tomorrow, and it is expected to rise by about 2.5% year-over-year (after falling 2.6% in December). Counter to the strong seasonal pattern, Japan reported a larger January current account surplus of JPY942 bln (JPY728 bln in December), but a sharp deterioration in the trade balance (JPY600 billion deficit vs. JPY135 bln surplus in December). By many, if not most, estimates the yen is more undervalued than the Chinese yuan, which suggests the relationship between currency valuation and trade position may not be as straight forward as often suggested. Tomorrow, Japan takes another look at Q4 GDP. The increase in capex gives scope for an upward revision from 0.1% quarter-over-quarter to around 0.3%).
• The 1.3% year-over-year rise in China’s consumer prices was the largest increase since January 2023. Core prices rose 1.8% (0.8% in January). Deflationary forces are gradually loosening their grip. China’s year-over-year PPI has been below zero since October 2022, but at -0.9% in February, it also was the least since January 2023. Nevertheless, more monetary (and fiscal stimulus) is likely to be delivered this year. The swaps market is pricing in a small cut in rates in the coming months.
