Dollar extends gains as the Houthis enter the conflict
WTI crude oil rebounds and emerges back above $100 per barrel
Yen fueled by intervention and rate hike warnings
Wall Street tumbles, but futures today suggest small rebound
Middle East tensions continue to escalate
The US dollar continued to gain ground on Friday against all its major peers as the war in the Middle East continued raging, despite US President Trump announcing an extension to the deadline for Iran to reopen the Strait of Hormuz or face strikes on power plants.
Israel struck steel factories, a power plant, and civilian nuclear sites on Friday, with the Iranian foreign minister saying that what is actually happening is contradicting Trump’s pledges and deadlines. The risk for a prolonged and broader conflict further grew during the weekend after Yemen’s Houthis launched their first strikes on Israel since the beginning of the current conflict.
Today, the dollar is extending its advance as US President Trump raised the prospect of the US taking Iran’s oil, reiterating his intentions to seize Kharg Island, which is a critical fuel hub for Tehran.
Oil surges but Fed hike bets recede
Oil prices surged on Friday and opened with a positive gap today, with WTI crude oil returning above the $100 mark, though it is somewhat pulling back today. However, this did not translate into more rate hike bets amid heightening inflation concerns, despite the further advance in the US dollar.
Market participants are now pricing in only around 4bps worth of rate hikes by the Fed this year, which is a notable downside revision to the 16bps expected on Friday. The dollar gained ground, probably driven by the further advance in 10-year Treasury yields, but the pullback in 2-year yields is adding more credence to the change in investors’ minds about this year’s implied rate path.
Gold rebounds, dollar/yen moves briefly above 160.00 but pulls back
Maybe that’s why gold is moving in tandem with the US dollar this time. Instead of pulling back, it rebounded on Friday and it is extending its recovery today. This is in line with the view that investors are unlikely to continue penciling in rate hikes indefinitely, and that when they become content with their pricing amid the ongoing geopolitical tensions, gold could start acting as a safe haven again.
The yen is the only currency gaining ground against the greenback today. The Japanese currency was bolstered after dollar/yen poked its nose above the round figure of 160.00, triggering fresh intervention warnings by Japanese officials and prompting BoJ Governor Ueda to note that they are closely watching yen moves and that the rising import costs stemming from the weak currency could justify raising interest rates in the coming months. This kept the probability of a BoJ rate hike in approximately a month at around 64%.
A cocktail of intervention and a hawkish hike by the BoJ in quick succession could provide enough fuel for a sustained bullish reversal in the Japanese currency.
Stocks suffer as risk aversion persists
On Wall Street, all three of its main indices lost more than 1.5% on Friday, with the tech-heavy Nasdaq shedding 2.15%. Besides the broader risk aversion, the major shift from rate cut expectations to rate hike bets has significantly weighed on the present values (PV) of high growth firms. However, judging by the rebound in gold and the pricing of the fed fund futures, maybe the time for bargain hunting is approaching as there may be little room for further steepening in the implied Fed rate path. Indeed, stock futures are in the green today, although it is still too early to start arguing about a resumption of the broader longer-term uptrend in equity indices.