Middle East War Intensifies, IEA Proposes a Coordinated Release of Strategic Reserves, G7 to Consider

The dollar is mixed as the North American session is about to begin. Heightened expectations of a rate hike next week have lifted the Australian dollar to new highs since June 2022. The Japanese yen is the weakest of the G10 currencies as the dollar extended yesterday’s gains to almost JPY158.50, its best level since the Fed/Treasury reportedly checked rates on January 23. The PBOC set the dollar's fix to a new multi-year low today. 

Oil prices are firm but within yesterday’s ranges. Three ships reportedly were attacked in the Strait of Hormuz and Persian Gulf earlier today. The G7 leaders will consider a proposal by the International Energy Agency to coordinate the release of 300-400 mln barrels of oil from strategic reserves. After Russia’s 2022 invasion of Ukraine, IEA members released a little more than 180 mln barrels. Estimate suggest something on the magnitude of 11-16 mln barrels a day are being disrupted by the Middle East war. 

Prices

G10

• The euro reached a five-day high yesterday near $1.1665, which retraced about half of what it has lost since the war on Iran began. It stopped slightly shy of the 200-day moving average, found near $1.1675 today. It settled near session lows (~$1.1610) on conflicting signs for the Middle East. Continued intense conflict around Iran, including three ships attacked in the region has pushed the euro back below $1.16 in Europe today. Initial support is seen around $1.1565, and then Monday’s low closer to $1.1505. 

• The dollar’s bearish shoot star on Monday saw limited follow-through selling yesterday. After falling to JPY157.65 on Monday, the greenback edged down slightly through JPY157.30 on Tuesday. After the low was recorded yesterday, the US dollar recovered to slightly above JPY158 in late trading. Follow-through buying lifted it a little above JPY158.50 in Europe. Monday’s high, ~JPY158.90, was the highest since the January 23 reported rate check by the Fed/US Treasury, when it reached almost JPY159.25. 

• Sterling settled near $1.3480 before the war on Iran began and it returned to there yesterday. But it settled near the session low, below $1.3420, as the greenback recovered late on those conflicting Middle East reports. It edged a little closer to $1.3400 today. Options for around GBP710 mln in options struck between $1.3410 and $1.3420, expire today. Nearby support is seen near $1.3360-80. 

• The Canadian dollar traded quietly within Monday’s range yesterday. The US dollar was confined to around 30-ticks on both sides of CAD1.3570. In the mostly weaker US dollar environment, the Canadian dollar lagged most G10 currencies but the Scandis and the yen yesterday. It is trading inside yesterday’s range so far today. It has been confined to a narrow CAD1.3555-CAD1.3585 range. A series of insides days is often seen as a continuation pattern, and the daily momentum indicators are headed down, but there seems to be a lack of near-term conviction. Last month’s low for the greenback was around CAD1.3500 and the low for the year, set late January, was closer to CAD1.3480.

• The Australian dollar recorded new high since June 2022 today near $0.7185 amid increased speculation of the central bank will hike rates next week. It settled near $0.7120 yesterday after approaching $0.7170 intraday. It spent little time today below yesterday’s settlement. More banks are reportedly now expecting the hike. The $0.7200 area is the next technical objective, and above there $0.7240. 

EM

• The Chilean peso rose nearly 2.7% yesterday to lead the emerging market currency complex, followed by the Peruvian sol and Colombian peso (~1.8%). The Mexican peso rose by about 0.25%. After reversing lower from above MXN18.00 on Monday, the greenback fell to nearly MXN17.45 before recovering. Still, the dollar settled slightly below Monday’s low (~MXN17.5980). It is consolidating quietly so far today with a firm bias in a roughly MXN17.5270-MXN17.6565 range. 

• After peaking near CNH6.9340 on Monday, the dollar was sold to CNH6.86 yesterday. It is trading uneventfully in the lower part of yesterday’s range. Nearby support is seen in the CNH6.84-CNH6.85 area, but last month’s low (~CNH6.8265) has not been seen for nearly three years. Yesterday, the PBOC fixed the dollar 0.25% lower to CNY6.8982, and today, it was set almost 0.10 lower at CNY6.8917, the lowest level since April 2023. Last Wednesday, the dollar’s reference rate was set at CNY6.9124. During this uncertain and volatile period, Beijing appears undeterred in its strategy to allow yuan appreciation. 

• The dollar consolidated today inside yesterday’s range against the Indian rupee. It held above INR91.8365 and recovered above INR92.00 in late dealings. Yesterday’s high was slightly above INR92.13. 

Other Markets

• Although outside Hong Kong and India, most large Asia Pacific equity markets rallied, Europe’s Stoxx 600 is off over 1% and US index futures are slightly lower. Of note, Taiwan’s Taiex rallied around 4.4$, the most in 11 months, led by TSMC, which reported a 30% jump in revenue in the first two months of the year.

• Benchmark 10-year yields have jumped 5-10 bp in Europe, and peripheral spreads have widened. At least two ECB officials appear to be threatening to hike rates. The swaps market has more than a 60% chance of a hike by the end of Q2 discounted. The 10-year US Treasury yield is up a little more than a basis point to nearly 4.17%.

• Gold is trading quietly in the upper end of yesterday’s range. So far today, it is in about a $25 range on both sides of $5200. Silver is off a little more than a dollar (~$87) as is probes yesterday’s low. 

• April WTI is trading firmly $86-$87 a barrel in Europe. It mostly held above $82 but below $89. The International Energy Agency has proposed the release of 300-400 mln barrels from strategic reserves. A G7 leaders meeting today will discuss. 

Data

• The Middle East war does not make today’s US CPI moot. Rather, it will illustrate where US inflation was before the shock hit. February CPI is expected to rise by 0.3% for an unchanged 2.4% pace. Still, following a 0.2% increase in January, the annualized pace in the first two months of the year would be 6%. Moreover, last March, CPI was flat on the month, the first time since the end of 2022, warning of the risk of an increase in the year-over-year measure. The core rate is seen rising by 0.2% (0.3% in January), with the year-over-year pace steady at 2.5%. Later in the session, the February US budget deficit will be reported. Through the first four months of the fiscal year, the budget shortfall was about $697 bln compared with $840 bln in the same period in the last fiscal year. However, this includes tariff revenue that will be rebated with interest. 

• Japan reported an unexpected 0.1% decline in February producer prices. The median forecast in Bloomberg’s survey was for a 0.2% increase. The year-over-year rate slipped to 2.0% from 2.3%. Producer prices peaked last year in February and March at 4.3%. The swaps market is pricing in about a 60% chance of a BOJ hike in April. Before the Middle East war began it was nearly 70%. The market has about 48 bp of tightening discounted this year compared almost 44 bp at the end of February, before the war started.

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