Market Brief: Dollar rises as Iran headlines, policy decisions, and earnings reports intersect

Good morning. The dollar is advancing and Brent crude prices are back above $110 a barrel as the US and Iran fail to make meaningful progress toward a deal that might relieve strain on global energy markets. Over the weekend, Iranian Foreign Minister Abbas Araghchi reportedly proposed that Tehran and Washington end their blockades and maintain a regional ceasefire while postponing nuclear talks to a later date, but the White House response was cool: press secretary Karoline Leavitt said President Trump was reviewing the proposal, adding that his red lines on Iran had been made “very, very clear”. With oil flows through the Strait of Hormuz still effectively halted, shortages are growing more acute and major price benchmarks are edging higher, putting pressure on energy-importing currencies while lending support to the safe-haven dollar.

The standoff raises the stakes ahead of a slew of central bank decisions in the coming days. The Bank of Canada, Federal Reserve, European Central Bank, and Bank of England are all expected to hold rates steady as they all face slightly-different versions of the same dilemma: whether the energy shock rippling through global markets will prove transitory or become embedded in prices, echoing the post-pandemic inflation surge that wrong-footed markets, monetary policymakers, and politicians alike. In our view, officials are likely to follow the Bank of Canada's lead in presenting scenario-based forecasts in place of traditional economic projections, while striking a hawkish tone that could push yields higher and put further stress on currency markets—but much could hinge on what Jerome Powell says in what is likely to be his last press conference as Fed chair*.

To wit, Japan’s yen is outperforming its peers against the dollar after central bank officials delivered a ‘hawkish hold’ in last night’s policy meeting, setting the stage for a hike in the coming months. Three Bank of Japan officials voted in support of an immediate rate increase, but were overruled, with Governor Ueda saying the the nine-member Monetary Policy Committee, “wants to spend a little more time scrutinising how the Middle East conflict affects the economy and prices, and whether the risks to growth and inflation could change,” before making the next move. Absent a major growth shock, we think persistently-high inflation—exacerbated by soaring energy import bills—should see the Bank move in June, lifting the benchmark interest rate to 1% for the first time in more than three decades.

The Canadian dollar is trading weaker alongside its counterparts even after Prime Minister Mark Carney announced plans for a C$25 billion sovereign wealth fund to finance major infrastructure projects. The “Canada Strong Fund”, Carney said, “will grow through asset recycling and reinvestment, creating even greater opportunities for future generations,” drawing an explicit comparison with Norway's sovereign wealth fund, which has become the world's largest.

The resemblance is superficial. Sovereign wealth funds are typically the preserve of oil exporters such as Saudi Arabia, or mercantilist manufacturing powers like China, who accumulate foreign-currency surpluses in need of a home. Canada sits atop vast natural resources, yet runs substantial budget and trade deficits, borrowing on global markets to cover current spending, putting it in the same category as the United States, which floated a similar idea last year (a proposal that has since gone conspicuously quiet). A sovereign wealth fund without a sovereign surplus is, in effect, a leveraged bet cloaked in the respectable clothing of Norwegian fiscal prudence, and isn’t likely to alter the long-term trajectory of the Canadian dollar.

The already-yawning gap between Wall Street and the rest of the world could widen this week amid a deluge of first-quarter results from some of America's most valuable companies, collectively representing almost $30tn in market capitalisation. Although OpenAI’s earnings report proved somewhat disappointing, the majority have so far beat estimates, reinforcing the gravitational pull of US equities and drawing global capital away from European and Asian bourses that are contending with weaker growth, thinner margins, and greater exposure to elevated energy prices. As long as that holds, there is little to suggest investors are prepared to unwind what amounts to an enormous long position on US markets and the dollar.

*Note that Republican Senator Thom Tillis has indicated he will support Kevin Warsh's nomination for Fed chair after the Justice Department dropped its probe into Chair Powell's management of the central bank's renovation project last week. Tomorrow morning's hearing should see the final hurdles cleared.

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Notes: DXY: Dollar index, ON: Overnight movement, DMA: Daily Moving Average, Pivot points are calculated on a one-month basis, 3-month and 10-year spreads are against USD, Implied V.: implied at-the-money option volatility

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