The Middle East War dominates the investment climate. The inflationary implications are first order considerations and there has been a large swing in expectations of central bank policy this year. Japan is a notable exception as the swaps market continues to discount almost two hikes this year. Eight of the G10 central banks meet in the week ahead, and the risk is only one moves, (Australia), where the futures market is discounting almost a 53% chance of a hike. Hawkish holds by the others seems like the most likely scenario, with the Federal Reserve adjusting its rhetoric in light of recent developments. The risks to its dual mandate are in both directions, and navigating the sequencing may be crucial to preserve what by most accounts is the famed soft-landing.
The war has boosted the demand for US dollars. We argue some of it has been the reduction of short dollar hedges as US assets were sold, and some demand may be related to unwinding carry trades. Still, on a nominal trade-weighted basis, the dollar has seen its best two-week performance in several years. At the same time, the financial sector has come under some strain, which is worth monitoring. The sharp rise in rates would have been unsettling in any case, but there have been signs of stress in the estimated $1.8 trillion private credit space. Direct bank lending is estimated at around $300-$350 bln. US bank share indices lost about twice as much as the S&P 500 did last week. Reports suggest that a liquid asset that the private credit funds can sell are collateralized loan obligations to meet redemptions and there has been pressure in the CLO market as well.
US
Drivers: The greenback remains bid and the war is taking up all the oxygen. The Federal Reserve meets and there is little doubt that it is standing pat. Governor Miran has indicated since the war began that he expects to dissent in favor of a quarter-point cut. The market shrugged off the halving of the Q4 25 GDP estimate to 0.7%, at an annualized rate. Consumption and business investment were weaker than initially projected. Final sales to domestic private parties, which excludes government, trade, and inventories, rose 1.9% rather than 2.4%.
Data: The Middle East war makes most of US economic data this week too old to have much impact. The economy had already seemed to slow before the war began, even if February's loss of jobs overstated the case. The March Empire State and Philadelphia Fed surveys may have conducted too early to incorporate the impact of rising gasoline prices and the uncertainty generated by what is by most surveys highly unpopular military action.
Prices: The market's heightened concerns about the inflationary implications of the war have spurred a dramatic shift in expectations for the Federal Reserve from 60 bp of cuts at the end of February to slightly less than 22 bp now. The two-year note yield rose above the effective Fed funds rate for the first time in a year. The average retail price of gasoline has jumped by more than 20% in the past two weeks. The Dollar Index rose nearly 1.5% last week a 1.4% surge in the first week of the war. It reached almost 100.55 before the weekend, its best level since last November. The momentum indicators are stretched but uncertainty of the war appears to be offsetting it. There is little on the charts until the 101.00-101.15 area.
EMU
Drivers: Another energy shock is hitting the euro hard. It is pushing yields to their highest level in a year, while the economy struggles to find much traction. Before the war began, the swaps market showed a little more than a 55% chance of a cut this year and now is discounting about 40 bp in tightening, and ECB hawks seem to be encouraging the speculation.
Data: The risk is that the new energy shock cuts the short the recovery in German sentiment tracked by the ZEW survey. In February, the assessment of current conditions stood at -65.9, the highest since July 2023. The expectations component in January had reached its best level (59.6) since July 2021 before pulling back slightly in February (58.3). At the end of the week, the aggregate January eurozone trade and current account figures are due. In 2025, the average monthly trade surplus was about 13.7 bln euros, down from 14.1 bln average in 2024. The current account surplus narrowed more. It averaged almost 21.3 bln euros a month last year and 33.9 bln in 2024. Still, it was around 2.5% of GDP.
Prices: The euro finished the week with a four-day slide in tow. It has fallen by about 3.3% since the war began and recorded a low at the end of last week near $1.1410, lowest level since last August. The slide comes despite the sharp rise in eurozone interest rates and a narrowing of the US premium over Germany. Momentum indicators are stretched but the price action remains poor. A break of the August 2025 low (~$1.14) signals losses toward $1.1340 initially.
PRC
Drivers: Beijing appears to be showing restraint by not taking advantage of the stronger dollar to weaken the yuan or step-up its harassment of Taiwan and other neighbors while the US is focused on the war on Iran. Last Wednesday, the PBOC set the dollar's reference rate at CNY6.8917, a new multiyear low. Since the war began, the yuan is one of the strongest emerging market currencies, off around 0.25%.
Data: Early Monday, China reports real sector data for February. Ironically, as consumer price inflation picked up, the economy appears to have slowed. Some of the downshift may be attributed to distortions caused by the new year holiday. Still, Beijing seemed to recognize something more is at work as it lowered this year's GDP target. Retail sales and industrial output are projected to have slowed, but capex may have improved after contracting on a year-to-date, year-over-year basis in the last four months of 2025. While we expect additional monetary stimulus, it may be too soon to expect cut in the loan prime rates, which will be announced at the end of the week.
Prices: The dollar consolidated in Monday-Tuesday's range against the offshore yuan (~CNH6.86-CNH6.9350) for the past three sessions. The upper end of this month's range is slightly below CNH6.95. After setting the dollar's fix at its lowest level since mid-2023 in the middle of last week (CNY6.8917) is lifted it slightly in the past two sessions. On a weekly basis, the dollar's reference rate has risen once since the end of last September. We would not be surprised if it increased in the weekend ahead.
Japan
Drivers: The dollar has returned to levels that on January 23 sparked reports that the Federal Reserve on behalf of the US Treasury checked prices. We think Japanese (and US officials, for that matter) are more sophisticated than to try to defend a fixed level in the dollar-yen exchange rate. The move seemed orderly. One-month implied volatility is around the middle of the range it has been in for several weeks. The rolling 30-day correlation of changes in the dollar against the yen and US 10-year yields is near 0.45, the highest since mid-January. The 30-day correlation with changes in the 10-year JGB yield is -0.06, and the correlation with the 10-year rate differential is around 0.38. The swap market sees little chance of a BOJ move next month, but the odds of a hike in April are around 60%, little changed since the start of the war.
Data: After contracting in H2 25, the Japanese economy appears to have begun the new year on somewhat stronger footing, but the new energy shock poses a new hurdle. Still, the final estimate of January industrial production may confirm the strongest monthly rise since last September, and the tertiary (services) activity may have risen for the first time in three months. The February trade balance shows a strong seasonal pattern of improving in February (no exception in the past 20 years) and after the JPY1.16 trillion deficit, the largest since January 2025, it is not difficult to envision. Although many observers still talk about Japan's export prowess, and by most calculations, the yen remains undervalued, Japan has not reported an annual trade surplus since 2020. The deficit last year was about JPY2.65 trillion (~$17.7 bln).
Prices: Ahead of the weekend, the dollar traded as close to JPY160 as it has since July 2024. In late NY trading recorded a marginally new session high (JPY159.75) that had been approached the local session, which is a bit surprising, if there was much of a fear of official intervention. Even if intervention is not particularly likely, as we have argued, some caution ahead of the psychologically important JPY160 is reasonable and barring new shocks, a short period of consolidation may be seen before a proper assault on JPY160. Options for $845 mln expire there today. The market may need some "fundamental" cover. The high in July 2024 was slightly shy of JPY162.
UK
Drivers: Sterling has fared better than most G10 currencies since the war began. The swaps market has swung from pricing in at least two rate cuts this year before the war to a nearly 65% chance of a hike. The Bank of England meets on March 19, and it will most likely keep the base rate at 3.75%.
Data: A few hours before the outcome of the Bank of England's meeting is announced, the labor market report will be issued. The UK jobs market appeared to have been stabilizing, though the unemployment rate unexpectedly ticked up to a new cyclical high of 5.2% in December. And while, the revisions to the US labor statistics are notorious, the UK data is also subject to significant revisions. For example, the December jobless was initially reported at -43k and was revised to only -6k. Unlike the US, the UK revisions have mostly been higher recently. At the end of the week, the UK will report on the government's finances, but sharp jump in yields since the Gulf War began renders will make them appear mostly out-of-date.
Prices: On the back of a stagnating January GDP, sterling was sent to a marginal new low for the year ahead of the weekend, to about $1.3220. Although it stabilized in the North American session, helped by a pullback in the US dollar after Q4 GDP was revised to 0.7% (quarterly annualized rate), it will begin the new week, like the euro, with a four-day slide in tow. A break of the $1.3180-$1.3200 area could signal a move toward $1.3000.
Canada
Drivers: We continue to see the Canadian dollar's movement best understood within a tight orbit of the US dollar rather than as a petrocurrency. This explains why the Canadian dollar has performed well since the war began, even though the Norwegian krone, which is more exposed to energy than Canada has depreciated. It also helps explain why the Canadian dollar's volatility is consistently the lowest in the G10 across tenors. The Bank of Canada meets on March 18. It will leave the policy rate at 2.25%. Since the war began, the swaps market has moved from discounting around 45% of a cut to pricing in 37 bp of hikes (one 25 bp move and nearly a 50% chance of a second).
Data: Canada's economy still appears vulnerable to the shocks emanating from the shift in US policy. The increased fiscal stimulus and monetary easing in the pipeline from last year's rate cuts have yet to generate much traction. The February CPI will be reported on March 16, a couple of days before the Bank of Canada meeting. The headline and core measures look stable around 2.4%-2.5%. Retail sales fell in three of the last four months of 2025.Weakness in auto sales dragged the headline lower (-0.4%) in January. StatsCan projects a strong 1.5% recovery in January. Canada also reports it monthly portfolio flows for January. Last year, foreign investors bought a net C$116 bln of Canadian stocks and bonds after C$193.2 bln in 2024. At the same time, the current account deficit widened to C$30.4 bln from almost C$15 bln in 2024.
Prices: After January trade shortfall was reported three-times larger than the median projection in Bloomberg's survey was reported on Thursday, the February employment data the following day was miserable, and the one-two punch sent the Canadian dollar to its lowest level in a little more than a week. The greenback bottomed on Monday near CAD1.3525 and reached CAD1.3715 before consolidating a little below CAD1.37 for much of the North American pre-weekend session. The CAD1.37 area has proved to be a formidable barrier. Despite repeated intra-day violation in the second half of February and earlier this month, the US dollar has not settled above it since February 6. The month's high was recorded on March 3 near CAD1.3755.
Australia
Drivers: We have attributed the Australian dollar's resilience, and in fact, it reached its best level last week since mid-2022, to the market's increased confidence that the central bank will hikes rates for the second time this year when its meeting concludes on March 18. The odds in the futures market have risen from about 10% at the end of February, before the war, to around 53% before the weekend. However, in fairness, it has been understandably hard to tease it out in our correlation work. The other consideration, we have noted, is the Australian dollar's correlation with gold. The rolling 30-correlation of changes in the two peaked near 0.80 in mid-February but around 0.65 now, it is still higher than it was at any time in H2 25.
Data: A couple of days after the central bank meeting, Australia will report February jobs data. Full-time positions jumped by 50.5k in January, almost twice the pace as January 2024. The unemployment rate was steady at 4.1% in January. It averaged 4.3% in the six months through November 2024. The participation rate was unchanged in January at 66.7%. In January 2025, it was at a record high of 67.2%.
Prices: After reaching almost $0.7190 in the middle of last week, the Australian dollar was sold to slightly to $0.6980 ahead of the weekend. The week's low was set Monday near $0.6955. The pullback coincided with the futures market trimming the odds of a rate hike next week from a little more than 70% almost 53% before the weekend. We foresaw the risk of "buy the rumor, sell the fact" type of activity after the central bank meeting, but our confidence would be higher if we did see profit-taking in the last couple of sessions. Still a break of last week's lows could see a test on $0.6900.
Mexico
Drivers: Since the war began, the Mexican peso has traded in a weaker range. We suspect it is more about risk off than the rise in US rates. That was our prior in part because the correlation of changes peso is stronger with the S&P 500 than the US rates.
Data: Mexico's economic calendar is light in the week ahead but is packed the following week with January retail sales, the IGAE activity report (similar to a monthly GDP), CPI for the first half of March, February unemployment and trade balance, and the Banxico meeting (March 26). Also in the region, Brazil's central bank meets on March 18, and it has indicated it will cut the Selic rate from 15.0%. Colombia reports January retail sales, industrial output, and trade figures. The central bank meets at the end of the month and is expected to cut its overnight 10.25% overnight lending rate by at least 25 bp.
Prices: The peso fell for the third consecutive week, the risk-off mood fomented by the war and the concerns about private credit. It matched the longest losing streak in a little more than a year. The Colombian peso was the strongest emerging market currency last week, rising by around 2.9%. It snapped a three-week down draft as investors apparently encouraged by the primary and legislative votes the previous weekend. The left, while strong, did not capture a majority in the legislature, and the primary suggests a tougher fight for its presidential candidate, Cepeda, in the May contest. Colombia's central bank meets at the end of the month. The swaps market is discounting at least a 50 bp hike. The Mexican peso has turned more volatile. Before the war began, the implied one-month vol was around 8.5% and it jumped to 13.8% at the start of last week, its highest level since last April. It finished the week slightly below 13%. The US dollar appears to have moved into a new trading range (~MXN17.45-MXN18.00) from around MXN17.10-MXN17.50 in the second half of January through February. A break of MXN18.04 could signal a breakout toward MXN18.12-13.
Reviewed by Marc Chandler
on
March 14, 2026
Rating:
