Written by Markets deal with conflicting signals amid Iran war
The US dollar gained ground against all its major peers on Thursday, as hopes of potential deescalation of the war in the Middle East started to fade, even as US President Trump said he would extend the deadline for not attacking Iran’s power plants.
Although Tehran had earlier this week rejected his 15-point proposal for a ceasefire, Trump posted on social media that the US will give Iran 10 days to open the Strait of Hormuz and that truce talks are ongoing and “doing very well.” Nonetheless, Iran has said that they are not engaging in talks with Washington, intensifying concerns that the war is unlikely to end anytime soon.
What further weighed on investors’ morale was a Wall Street Journal report later in the day that said the Pentagon is looking at sending up to 10,000 additional ground troops to Iran.
The diminishing hopes of a potential truce in the coming days have extended the rebound in oil prices, with WTI crude prices returning to the 96.00 zone, after hitting a low of 85.75 on Monday. Subsequently, inflation concerns have intensified, sending Treasury yields even higher and prompting market participants to now pencil in around 16bps worth of rate increases by the end of the year. This translates into a strong 65% chance of a quarter-point hike.
Dollar/yen flirts with intervention as it touches 160.00
The strength of the dollar has pushed dollar/yen to test the 160.00 psychological zone, intensifying concerns about a potential intervention by Japanese authorities. Despite the probability of a BoJ rate hike in April rising to 63%, the yen has fallen victim to the dollar’s rally, prompting Japan's finance minister to flag for the umpteenth time the possibility of taking “bold actions” to counter currency moves.
Katayama once again cited oil price moves as the main catalyst, adding that she is not watching only the FX market but also commodities. This adds extra weight to earlier reports that her ministry is considering possible intervention in crude oil futures. Nevertheless, with the moves in dollar/yen being mainly driven by dollar strength rather than yen weakness, the threshold for actual action may have risen. Perhaps Katayama would choose to wait for the 161.00 or 162.00 zones.
Gold and stocks extend decline on steeper Fed rate path
Today, the dollar is stabilizing against most of its major counterparts, pulling back versus the risk-linked aussie and kiwi. However, the moves are far from suggesting that investor optimism has returned.
Having said that though, investors are unlikely to continue pricing in Fed rate hikes indefinitely. At some point, they may start feeling content with the implied path, given the current environment. This is when they may seek shelter and safety in gold. In other words, it is not implausible for gold to take its safe-haven suit out of the closet in the foreseeable future. After all, further declines may tempt some bargain hunters to grasp the opportunity and buy at more attractive levels.
The precious metal slid yesterday on the rising inflation fears and rate hike bets, but hit support at around $4,351 and today, it is rebounding somewhat.
On Wall Street, all three of its main indices tumbled more than 1% on Thursday, with the tech-heavy Nasdaq recording a 2.38% loss. Although futures are in the green today, the shift from rate cuts to rate hikes is well weighing on present values (PV) of high-growth tech firms that are usually valued by discounting future free cash flows. With that in mind, more headlines pointing to a still-raging war could trigger another round of stock selling.
by XM.com
