Restrained Risk-Off snbchf.com

by
Marc Chandler
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The collapse of US-Iran negotiations and the US threat to blockage Iranian ports presents an escalation in the conflict that the market’s did not anticipate. Equities and bonds are lower, and the dollar is mostly firmer. However, so far, the moves appear restrained. Iranian oil has largely been shipped to China and with the Trump-Xi meeting in a month, the blockade could jeopardize it. Moreover, the risk of escalation is palpable as Iran and its allies could try to close the Bab-el-Mandeb strait, which would be an additional disruption and neutralize the Saudi east-west pipeline that bypasses the Strait of Hormuz.

Hungary’s Orban saw a stunning defeat in the weekend election and the Hungarian forint is the strongest currency in the world today. It is up nearly 2% against the US dollar and around 2.3% against the euro amid speculation that Budapest’s pariah status in Europe will end and it will take steps to free up EU funds.

Prices

G10

• The euro rose to almost $1.1740 before the weekend, its best level since March 2, when the market first responded to the start of the Middle East War. It was the culmination of a five-day rally, and the euro settled slightly below $1.1725. The failed negotiation and the US blockade of Iranian ports caught the short-term market leaning the wrong way. The euro slipped slightly below $1.1660 almost immediately when the markets opened earlier today. It gradually recovered to $1.1700 as European markets opened, where it has consolidated above $1.1680.

• The greenback finished firmly against the yen ahead of the weekend. It has spent much of the previous two sessions below the 20-day moving average but settle above it before the weekend (~JPY159.20). Still, the dollar’s second consecutive weekly fall, the first back-to-back weekly decline since the end of January, would seem to reduce the risk of near-term intervention. The dollar extended its gains to JPY159.85 in early dealings today. It has been confined to a narrow range so far and has held above JPY159.55. Options for about $650 mln at JPY159.50 expire today.

• Sterling settled near $1.3460 last week, its highest close since the Middle East war began. The nearly 2% gain was its second-best week of the year. The disappointing weekend developments pushed sterling to almost $1.3380 in early trading today but recovered to almost $1.3435 but may struggle to extend gains much further. Options for GBP450 mln that expire today at $1.3545 may help cap it.

• The US dollar initially extended its losses for a fifth consecutive session against the Canadian dollar. It nicked the CAD1.3800 and traded below the 20- and 200-day moving averages in North America ahead of the weekend before recovering. The recovery stalled near CAD1.3840 before the weekend. The gains were quickly extended in early Asia Pacific activity today, to almost CAD1.3880. Options for $900 mln at CAD1.39 expire today. This month’s high was near CAD1.3950.

• The Australian dollar consolidated ahead of the weekend. It held below Thursday’s high ($0.7095) by 1/100 of a cent according to Bloomberg. The session low, near $0.7055, was recorded in the European morning. The Aussie’s ~2.5% gain last week was its largest since late January. Yet the Aussie gapped lower today in thin early turnover. It fell to nearly $0.6985 before finding bids. It recovered and filled the opening gap that extended to pre-weekend low. Options for A$711 mln at $0.7050 expire today. The intraday momentum indicators warn of the risk of a setback toward $0.7020.

• The Mexican peso has a five-day advance coming into today’s session. It appreciated by about 3.3% last week and reached its best level since March 2. The dollar knocked on MXN17.25 before the weekend. It settled near MXN17.2270 before the war. It was the strongest in the region last week. The Brazilian real gained 2.7% and it rose to the best level since early 2024 (US dollar fell a little below BRL5.01). The Colombian peso eked out less than 0.5% gain but it was sufficient to reach its best level since early February (US dollar fell slightly through COP3625). However, the risk-off mood will likely snap the Mexican peso’s five-day run. Because the peso is among the nearest emerging market to 24-hour a day activity, it is used as a proxy sometime for less accessible emerging market currencies. The dollar reached almost MXN17.4450 initially today but has ground down to nearly MXN17.3650 in European turnover. The intraday momentum indicators are getting stretched. Nearby support is seen ahead of MXN17.35.

• The yuan finished last week on a firm note. The greenback approached but held above the multiyear low recorded in the middle of last week (CNH6.82). The greenback was bid initially today and traded slightly above CNH6.8435. However, it has trended lower and is knocking on CNH6.83 in the European morning. The PBOC has been guiding the yuan higher through the daily fix. The broad dollar gains made it unlikely that it would do so today. The dollar’s reference rate was set today at CNY6.8657 (CNY6.8654 before the weekend).

• The jump in crude oil prices weighed on the Indian rupee and offset some of the gains that had been spurred by the recent currency controls. The dollar settled near INR92.73 at the end of last week and gapped higher today to reach almost INR93.41, its highest level since April 2. India reported March CPI rose to 3.40% from 3.21% in February. It is the highest since last March. A national holiday closes Indian markets tomorrow.

Other Markets

• Equities are mostly lower today, though there were some notable exceptions in the Asia Pacific region, where China, Taiwan, and some smaller bourses gained. The MSCI Asia Pacific Index rose 6% last week and snapped a five-week drop. Europe’s Stoxx 600 is off about 0.75% today. It rose by 3% last week, its third week advance. US index futures are trading 0.5%-0.6% lower. Last week, the S&P 500 rose by 3.5% and the Nasdaq gained nearly 4.7%.

• Benchmark 10-year yields are firmer today. They rose five basis points in the Australia and New Zealand, and two basis points in Japan. European yields are mostly 1-2 bp higher, and the 10-year US Treasury yield is almost two basis points higher to poke above 4.33%.

• Gold gapped lower and fell to $4644.50 before recovering and filled the gap that extended to the pre-weekend low near $4731. It stalled slightly shy of $4740. Silver also gapped lower and filled the opening gap before being capped in front of $75.

• May WTI gapped higher. The pre-weekend high was near $100.40 and today’s low has been about $101.90. It reached nearly $105.65 and is around $104.40 in late European morning turnover.

Data

• Ahead of tomorrow’s March PPI and Wednesday’s Beige Book, the US sees March existing home sales today. They tend not to move the markets. Existing home sales have been flattish for the last couple of years in the trough after pandemic-related surge in 2020. The three, six, and 12-month moving averages have converged between 4.07 and 4.13 mln sales (seasonally adjusted annual rate).

• Canada reports building permits today, but more importantly, Canada holds three byelections that will likely secure a parliamentary majority for Prime Minister Carney’s Liberals. With the latest defection, the Liberals are one seat shy of a majority and are favored to win at least two of the byelection contests.

• China’s March lending figures were weaker than expected. Aggregate financial rose by CNY5.2 trillion and the median forecast in Bloomberg’s survey looked for a CNY5.6 trillion increase. Corporate bond issuance increased and helped offset the decline in government bond sales. Tomorrow, China is expected to report the March trade figures, and the surplus is expected to have risen to around $107.5 bln from nearly $91 bln in February.

• India reported a small increase in March CPI to 3.40% from 3.21%. The World Bank expects inflation to rise to 4.9% in the fiscal year that began on April 1. Before the Middle East war, the World Bank’s forecast was 4.0%. It sees growth slowing to 6.5% from around 7.2% in the fiscal year that just ended. The Reserve Bank of India projects 6.9% growth this year and 4.6% CPI.

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About Marc Chandler

He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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