Hope Lifts Stocks and Bonds snbchf.com

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Marc Chandler
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There continues to be hope in the capital and commodity markets that a US-Israel war on Iran can be brought to a conclusion soon. While news reports indicate that the US had drafted a 15-point peace plan that has been delivered to Iran via Pakistan, other reports indicate that US is sending more people and weapons to the region. Iran has reportedly not yet formally responded to the proposal and has continued missile and drone attacks in the region. Meanwhile, a few more ships appear to have transited the Strait of Hormuz.

While the market has jumped back into risk assets at the little glimmers of hope along the way of a short conflict, the derivatives market continues to price in seemingly hawkish central bank policy responses, even if not as extreme as last week. The dollar was sold in a flurry of activity late in North America yesterday, but follow-through has been limited today, and the greenback is trading with a firmer bias. Equities and bonds are recovering, while oil prices (WTI and Brent) are pinned in narrow ranges near yesterday’s lows.

Prices

G10

• Yesterday, the euro surrendered about half of the gains posted on Tuesday when many latched on the “five-day grace period” seemingly granted by President Trump as a sign of progress toward ending the conflict. Yesterday the market was less sure. However, late in the session, a new wave of optimism washed across the markets and in thin, late North American trading, the euro spiked to new session highs, slightly shy of $1.1630. Monday’s high was closer to $1.1640. It is consolidating today, mostly between $1.1585 and $1.1630. The $1.16 area may still be a battleground. Options for 1.8 bln euros that expire at $1.1605 today. Another pile for nearly 1.4 bln euros expires at $1.16 tomorrow.

• For the third consecutive session, the dollar held above the previous session’s low against the Japanese yen yesterday and is trying to extend it today. The greenback recorded an inside yesterday. It is trading quietly today and has been capped near JPY159.20. The market does not appear to have given up on the JPY160 area. There are $885 mln of options that expire at JPY160 today.

• Sterling gave up a little more than half of Monday’s gains yesterday and found bids above $1.3350. In peaked around $1.3445 in the flurry of activity in late North American turnover yesterday. It is trading inside yesterday’s range so far today and is in the narrowest range in nearly two weeks: ~$1.3370-$1.3435. Options for GBP1.14 bln at $1.3350 expire tomorrow.

• The US dollar reached CAD1.3785 yesterday, a two-month high, and where options for $422 mln expire today It is bid in European turnover and reached almost CAD1.3800. We have been targeting the CAD1.38 area, which houses the 200-day moving average and the (50%) retracement of the greenback’s decline from last November’s high (~CAD1.4140). Options for $590 mln expire at CAD1.38 today. A convincing push above there could target CAD1.3850.

• The Australian dollar fell for the third consecutive session, and is extending it into the fourth session today, although it is inside yesterday’s range. It settled below $0.7000 for the second consecutive session. It recovered almost back to $0.7000 late yesterday after initially sold slightly through $0.6940. Monday’s low was near $0.6910. Options for A$1.4 bln expire at $0.6950 today, and the low so far is about $0.6960. A break of the $0.6890-$0.6900 area would inflict technical damage that could spur at least another cent-decline.

• The Mexican peso consolidated yesterday and enjoyed as slightly firmer close amid the late US dollar retreat. The dollar had already begun coming off the late NY morning high and thin dealings after the NY markets closed, the greenback was sold to new session lows near MXN17.70. It has edged a little lower today. Since the war began, the dollar has poked above MXN18.00 on an intraday basis twice, but both times, for different reasons, the dollar came off and settled closer to session lows. The 20-day moving average is around MXN17.6660 and the greenback has not settled below it since the war began.

• The dollar posted an inside day against the yuan yesterday. The dollar traded in wider intraday ranges in the first week or so of the war but nearly two weeks now has been broadly range bound~CNH6.860-CNH6.92). It remains within Monday’s range so far today (~CNH6.8775-CNH6.9185). The five- and 20-day moving averages of the dollar against the onshore yuan have converged a little above CNY6.89. The PBOC fixed the dollar at CNY6.8911 (CNY6.8943 yesterday).

• The Indian rupee fell to a record low today. Intervention by the RBI failed to prevent the US dollar from edging to a marginal new high against the rupee near INR93.9835. Global asset managers have liquidated around $11 bln of Indian equities this month. Bonds in the international indices have also experienced record outflows. Month-end importer dollar demand also has been reported.

Other Markets

• Although US indices finished lower yesterday, hope that a ceasefire can soon be agreed up in the war on Iran is helping lift equities today. Nearly all the markets in the Asia Pacific region rallied earlier today with most of the large markets up more than 1%. Europe’s Stoxx 600 is up for the third day, which if sustained would be the longest advance in more than a month. US index futures are up 0.8%-1.0%.

• Bonds are rallying. While the 10-year JGB yield fell by less than a basis point, the yield fell 9-11 bp in Australia and New Zealand. Benchmark yields are off mostly 5-8 bp in Europe and peripheral spreads have narrowed. The 10-year US Treasury yield is off almost four basis points to 4.32%.

• Gold is trading at new high for the week. It reached a little above $4600 after bottoming Monday slightly below $4100. The next technical target may be around $4685. Silver approached a four-day high near $74.55 and is consolidating now closer to $72.50. Monday’s low was near $61.

• May WTI is confined to an extremely narrow range today (~$86.60-$89.55). The week’s low was recorded Monday near $84.35. The 20-day moving average is around $85.60, and the May contract has not traded below it since the war began.

Data

• The US February import and export prices seem dated now since the war, but import prices likely turned higher on a year-over-year basis, while the base effect warns that export price increases may have slowed at rising 2.6% in January. They peaked at 3.9% last September. Q4 25 current account deficit is also due. It may be the smallest in a few years. For the year as a whole, it may be smaller than 2024 but it still will be the second largest on record. The report tends to have little market impact.

• After falling by 0.5% in January, UK consumer price index rose by 0.4% in February. Yet the base effect kept the year-over-year pace steady at 3.0%. The core rate ticked up to 3.2% from 3.1%. Service price inflation slowed to a still elevated 4.3% from 4.4%. The swaps market is discounting about a 70% chance of a hike next month. At the end of last week, it was seen as almost 80% probability.

• Germany’s IFO survey showed weaker sentiment. The current assessment and expectations softened in March, and the overall business climate assessment stands at 86.4 (88.4 in February, revised from 88.6), the weakest since last February.

• Australia’s CPI was flat in February, and the year-over-year rate edged down to 3.7% from 3.8%. The trimmed mean rose by 0.2%, leaving the year-over-year rate steady at 3.3%, given the revision from 3.4% initially. The Reserve Bank of Australia raised rates twice this year and before the war on Iran started, the futures market was discounting another hike fully and almost a 50% chance of yet another. The market peaked on Monday, with three hikes fully discounted for the remainder of the year. Now, the futures market has two hikes fully discounted and about a 25% chance of a third.

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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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