Written by Heaviest day of strikes, despite end-of-war rhetoric
The US dollar rebounded against most of its peers on Tuesday, losing only against the Australian dollar and closing the day virtually unchanged against the Canadian dollar. Today, it is slightly on the back foot again, but it seems to be holding on to some of yesterday’s gains.
Although US President Trump said on Monday that the war is nearly over, the conflict escalated with reports calling Tuesday as the heaviest day of strikes yet. The US and Israel continued attacking Tehran today as the new government warned against any anti-government protests, saying that its forces are ready with “fingers on the trigger,” while Iran renewed attacks in Israel, Lebanon and the Gulf.
With the war entering its 12th day, market participants are finding it hard to believe that there will be truce soon, and that’s why they priced out again some basis points worth of Fed rate cuts by the end of the year. According to Fed funds futures, investors are now expecting 38bps worth of reductions by the end of the year, down from 43 yesterday.
US CPI data on the radar, aussie rallies on RBA hike bets
Today, investors will keep an eye on the US CPI inflation data for February, with both the headline and core rates expected to have held steady at 2.4% y/y and 2.5% y/y respectively, still above the Fed’s objective of 2%. With the ISM manufacturing prices subindex skyrocketing to 70.5 during the month and the non-manufacturing retreating somewhat but remaining elevated at 63, there may be some upside risks.
Therefore, sticky inflation even before the war in the Middle East erupted, which triggered fears of massive energy-related price pressures, could prompt traders to further scale back their rate cut bets, which may help the dollar extend its recovery and resume its prevailing upside trajectory.
The Australian dollar was yesterday’s main winner, extending its gains today and surging to a near four-year high after Deputy RBA Governor Hauser said that policymakers will genuinely debate whether they should raise interest rates when they meet next week. According to Australia’s Overnight Index Swaps (OIS) market, the probability of a 25bps rate increase next week has risen to 75%, while there is a decent 40% chance of another hike in May.
With inflation in Australia hovering well above the upper end of the RBA’s target range of 2-3%, and rising concerns about further stickiness due to skyrocketing energy prices amid the war in Iran, it seems that the RBA is likely to remain the most hawkish major central bank, allowing the aussie to continue flexing its muscles, even against the US dollar.
Stocks subdued ahead of US inflation prints, gold rebounds
On Wall Street, both the Dow Jones and the Nasdaq were little changed yesterday, while the S&P 500 pulled back somewhat. However, stock futures are pointing to a lower opening today, perhaps as hopes that the war could end soon are fading amid the continuation of strikes.
Sticky CPI data today could be an extra headache for investors, as expectations of higher borrowing costs could translate into lower present values for high-growth tech firms that are valued by discounting expected free cash flows for the quarters and years ahead.
Gold rebounded and managed to close above 5,200 for the first time since March 2. This corroborates the notion that although the safe haven of choice during this war is the US dollar, there are still investors seeking shelter in the precious metal. This, combined with data suggesting that the People’s Bank of China remained a steady driving force of demand for gold, could allow for some further recovery, especially when investors become satisfied about pricing in the proper Fed rate path and thereby the dollar’s rise slows down.
by XM.com
