Market Briefing: Let's make a deal
US/Iran ceasefire. News of a ceasefire has boosted risk sentiment. Equity futures higher, oil lower, USD weaker. AUD & NZD at multi-week highs.
Lingering issues. Developments are a positive. But economic aftershocks of events still in the pipeline. RBNZ meets today. No change in rates expected.
Global Trends
Markets have been on edge to see if President Trump crystallizes his ramped-up threats of strikes against infrastructure sites across Iran (or the “whole civilization” as he posted overnight) or if this was another TACO event (i.e. Trump Always Chickens Out). The US had been turning up its verbal pressure, and yesterday it reportedly bombed Kharg Island (Iran’s primary oil export hub).
That said, reports progress between the two sides had been made and that Pakistan (a mediator in talks) requested a short-term extension started to improve the market mood during overnight US trading. The optimism was confirmed this morning with President Trump announcing a 2-week ceasefire had been agreed. According to President Trump Iran has provided a workable 10-point proposal and that the break from hostilities was “subject to the Strait of Hormuz reopening”.
US equity futures have jumped on the positive news (S&P500 futures +1.7%), while oil prices tumbled (WTI crude has fallen ~15% since the announcement). In FX, the USD has lost ground, inline with the improved risk sentiment and lower oil prices given the US is a “net energy exporter” (hence the USD has become positively correlated to oil). The EUR has risen (now ~$1.1670, a multi-week high), and USD/JPY has dipped (now ~158.85). Cyclical global growth linked currencies such as the NZD (now ~$0.5805) and AUD (now ~$0.7060, a 2-week high) have strengthened.
For short-sighted markets the ceasefire news looks set to underpin risk sentiment and drag on the USD over the near-term. However, as we have seen in the past couple of months, the situation in the Middle East is fluid and given the volatile participants involved, things could deteriorate at any time. Moreover, an underlying issue important for the global economy is when/if the flow of energy/vessels via the Strait of Hormuz gets back to where it was. The ~6-week conflict might cast a long shadow over the world economy because disruptions to energy supply and spillovers into other products/supply chains may take months/quarters to clear up, not days/weeks. The economic fallout from the conflict is in its infancy. As scar tissue shows up, more bouts of market turbulence should be anticipated down the track, in our opinion.
Global event radar: RBNZ (Today), US CPI (Fri), China GDP (16th Apr)
Trans-Tasman Zone
This morning’s announcement by President Trump that the US/Israel/Iran had reached an agreement on a '2-week ceasefire' has generated a positive jolt across risk markets (see above). The drop in the oil price, jump in equity futures, and weaker USD have propelled the NZD (now ~$0.5805) and AUD (now ~$0.7060) to respective ~2-week highs. The AUD has also outperformed on the crosses with AUD/EUR (now ~0.6050), AUD/GBP (now ~0.5276), AUD/CNH (now ~4.8345), and AUD/JPY (now ~112.15) strengthening, while AUD/NZD (now ~1.2170) has consolidated at elevated levels.
Across the Tasman, the RBNZ meets today (12pm AEST) and Governor Breman holds a press conference (from 1pm AEST). No change in interest rates is widely anticipated. This also isn’t a forecasting round so the RBNZ won’t be releasing updated projections. In a recent speech the RBNZ Governor outlined that policymakers are focused on medium term inflation trends and are willing to accept a short-term oil induced inflation spike assuming it doesn’t appear set to turn into a permanent shock. We expect a similar ‘cautious’ tone today given the unfolding events in the Middle East and impacts on the ‘energy importing’ NZ economy. However, with sentiment about the situation in Iran improving, we do think that the undervalued NZD has scope to recover more lost ground. Our models currently indicate NZD ‘fair value’ is closer to ~$0.61.
For the AUD, the US/Iran ceasefire deal is a short-run supportive factor as it lessens some of the downside risks facing the global economy. However, these risks haven’t been completely removed. As discussed above, the impact on supply-chains and energy supply could take quite a bit of time to clear up. This in turn can continue to act as a handbrake on global activity, particularly across Asia which is where ~85-90% of the energy shipped via the Strait of Hormuz is sent. Moreover, given how much more RBA tightening is already priced in (markets are factoring in another ~55bps of RBA rate hikes by year-end), the looming global slowdown, and with negative domestic consequences of higher mortgage rates and fuel costs still to come, upside in the AUD should be capped, in our view.
AUD & NZD event radar: RBNZ (Today), US CPI (Fri), AU Jobs (16th Apr), China GDP (16th Apr), NZ CPI (21st Apr)
AUD levels to watch (support / resistance): 0.6840, 0.6890 / 0.7020, 0.7080
NZD levels to watch (support / resistance): 0.5630, 0.5690 / 0.5780, 0.5810
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
WEDNESDAY (8th Apr)
NZD RBNZ Decision (12pm)
NZD RBNZ Press Conference (1pm)
EUR Germany Factory Orders (Feb) (4pm)
THURSDAY (9th Apr)
USD Fed's Daly Speaks (3:05am)
USD FOMC Meeting Minutes (4am)
EUR ECB's Sleijpen Speaks (8:45pm)
USD PCE Deflator (Feb) (10:30pm)
USD Initial Jobless Claims (10:30pm)
FRIDAY (10th Apr)
CNY CPI/PPI Inflation (Mar) (11:30am)
EUR ECB's Guindos Speaks (8pm)
CAD Jobs Report (Mar) (10:30pm)
USD CPI Inflation (Mar) (10:30pm)
SATURDAY (11th April)
USD Uni. Michigan Sentiment (Apr P) (12am)
*Note, all times/dates provided are AEST
About the author
