Market Briefing: Middle East tensions flare up

CalendarApril 15, 2024
  • Negative vibes. Sentiment soured on Friday as Middle East concerns rose. Equities & bond yields lost ground. The stronger USD pushed down the AUD.

  • Middle East. The situation in the Middle East remains fluid. Developments will be front of mind for investors at the start of the new week. Will oil prices spike?

  • Event radar. US retail sales due tonight. Several Fed members speaking this week. Across the region, China GDP, NZ CPI & AU jobs report are due.

Risk sentiment ended last week on the backfoot, and geopolitical developments over the weekend point to further potential short-term turbulence. On the economic front, US Fed officials that spoke generally continued to downplay the prospect of near-term rate cuts. San Francisco Fed President Daly said there is “no urgency to adjust the policy rate”, the Boston Fed’s Collins noted that while the recent data didn’t materially change her outlook it did “highlight uncertainties related to timing”, and the Atlanta Fed’s Bostic repeated his expectation for only one cut later this year. With markets now not factoring in a full Fed rate cut until September, and a very modest easing cycle penciled in after that, we would argue that the “hawkish” repricing in US interest rates has largely played out.

Compounding the prospect for tighter monetary policy for longer were nerves of an impending Iranian attack on Israel. These forces sapped risk appetite on Friday. Equities declined (the US S&P500 fell 1.5%, its largest one-day fall since January), as did bond yields (US rates declined 6-7bps across the curve), while the USD extended its uptrend as safe-haven demand kicked into gear. EUR (now $1.0635) and GBP (now $1.2445) are down near their lowest levels since November, while USD/JPY consolidated as demand for the JPY also picked up. Cyclical currencies came under downward pressure with the AUD hovering around its 2024 lows (now $0.6465).

Geopolitical concerns crystallised over the weekend with Iran launching a drone and missiles attack on Israel. Over the start of the new week markets may fret about the prospect of retaliation and/or an escalation of the regional conflict. Oil prices, a barometer of Middle East tensions, have so far been well behaved (WTI crude is now ~$86/brl) and as our chart shows they are trading in line with fundamentals. However, supply worries might see oil prices spike higher as a risk premium is factored in. If this occurs, sentiment could deteriorate further, and this could see currencies like the USD and JPY outperform.

The situation in the Middle East remains fluid, and developments will remain front of mind for investors, however assuming cooler heads prevail, and tensions simmer down, we think the upcoming US and key global data and speeches could see the lofty USD lose ground. March US retail sales are due tonight (10:30pm AEST), the China data batch which includes Q1 GDP is released tomorrow, and there are several US Fed members speaking this week (including Chair Powell on Wednesday morning AEST). In our opinion, there is a chance things moved too far too fast with markets discounting a more “hawkish” outlook than the Fed (markets are assuming less than 4 rate cuts by end-2025 compared to 6 projected by the Fed). Softer US consumer spending, a pickup in momentum in China, and/or measured comments by Fed officials continuing to point to the start an easing cycle later this year could revive US rate cut bets and see the USD slip back.

Global event radar: US Retail Sales (Tonight), China GDP (Tues), Fed Chair Powell Speaks (Weds), UK CPI (Weds), ECB President Lagarde Speaks (Thurs), Japan CPI (Fri), Eurozone PMIs (23rd Apr), US GDP (25th Apr), BoJ Meeting (26th Apr), US PCE Deflator (26th Apr), Eurozone CPI/GDP (30th Apr), US Employment Cost Index (30th Apr), China PMIs (30th Apr)

AUD corner

The bout of risk aversion stemming from concerns about the Middle East situation and the resultant USD strength weighed on the AUD on Friday (see above). At ~$0.6465 the AUD is tracking near the bottom of its 2024 range with the backdrop also seeing the AUD underperform on the crosses. AUD/JPY shed ~1.2% with the pair back down around ~99. AUD/CNH declined by ~0.9% to be back below its 1-year average (now ~4.70), while the AUD also dipped by a modest ~0.2% versus the EUR and GBP.

As discussed , the unfolding situation in the Middle East will dominate the headlines at the start of the new week and an escalation would further dampen sentiment and exert more pressure on cyclical currencies like the AUD. That said, we think the AUD may already be factoring in a lot of negatives down near current levels, and any further moves lower may not be overly large or last too long. As shown by our scatter plot, a wide gap has opened between where the AUD is trading and the level of the VIX volatility index. Moreover, market positioning already looks quite ‘net short’ the AUD with CFTC futures contracts (a commonly used FX positioning proxy) stretched. Statistically the AUD is also in rarefied air. Since 2015, when Australia’s capital flow dynamics turned more supportive, the AUD has only traded below ~$0.6450 ~5% of the time. And we believe Australia’s position as a net energy exporter should leave the AUD in relatively good stead, particularly against currencies such as the EUR and GBP, if oil prices spiked on supply concerns.

For the AUD, in addition to Middle East developments, there are a few economic releases and speeches on the radar that may generate volatility. In addition to the numerous US Fed members speaking this week, US retail sales are released tonight (10:30pm AEST), China Q1 GDP is due tomorrow, NZ CPI inflation (which can provide a guide to the upcoming Australian data) is due Wednesday, and the monthly Australian labour force report is on Thursday.

We see risks US consumer spending softens, the China data shows momentum picked up in early 2024, NZ domestic inflation remains sticky, and that the March Australian jobs report holds up better than feared and a large statistical payback doesn’t materialize. In our opinion, this type of mix could see RBA rate cut expectations watered down further. And assuming the Middle East situation doesn’t boil over, this could give the beleaguered AUD renewed support, especially on crosses such as AUD/EUR and AUD/GBP where their respective central banks may be nearer to the start of an easing cycle and/or their domestic economic environment is less favourable.

AUD event radar: US Retail Sales (Tonight), China GDP (Tues), Fed Chair Powell Speaks (Weds), NZ CPI (Weds), UK CPI (Weds), ECB President Lagarde Speaks (Thurs), AU Jobs (Thurs), Japan CPI (Fri), Eurozone PMIs (23rd Apr), AU CPI (24th Apr), US GDP (25th Apr), BoJ Meeting (26th Apr), US PCE Deflator (26th Apr), Eurozone CPI/GDP (30th Apr), US Employment Cost Index (30th Apr), China PMIs (30th Apr)

AUD levels to watch (support / resistance): 0.6400, 0.6430 / 0.6540, 0.6585

SGD Corner

USD/SGD has jumped up recently with the pair near ~1.36 for the first time since last November. The stronger USD on the back of the upward repricing in US interest rates following a string of positive data surprises, including CPI inflation, and the Middle East tensions have been the catalysts. This overpowered the ongoing ‘hawkish’ bias from the MAS at Friday’s review where the bank maintained the slope, centre and width of the SGD NEER band given lingering inflation worries. Things have been mixed on the crosses. EUR/SGD has fallen towards the bottom of its 2024 range (now ~1.4488), with the EUR coming under pressure after the ECB firmly opened the door to a potential rate cut as soon as June. By contrast, while it slipped back on Friday, SGD/JPY (now ~112.67) remains near the upper end of its cyclical range.

As mentioned above, the situation in the Middle East will be in focus early this week, and a further deterioration in sentiment/spike in oil prices could see the USD (and USD/SGD) lift further. However, on the assumption tensions de-escalate, we think the fundamentals could see the USD (and USD/SGD) give back some ground as we see risks US retail spending underwhelms, US Fed members continue to point to policy easing later this year, and/or the China data improves.

SGD event radar: US Retail Sales (Tonight), China GDP (Tues), Fed Chair Powell Speaks (Weds), ECB President Lagarde Speaks (Thurs), Japan CPI (Fri), Singapore CPI (23rd Apr), Eurozone PMIs (23rd Apr), US GDP (25th Apr), BoJ Meeting (26th Apr), US PCE Deflator (26th Apr), Eurozone CPI/GDP (30th Apr), US Employment Cost Index (30th Apr), China PMIs (30th Apr)

SGD levels to watch (support / resistance): 1.3520, 1.3570 / 1.3620, 1.3640

Market Moves

Peter Dragicevich

Currency Strategist - APAC

Upcoming Events

MONDAY (15th April)

USD Fed’s Logan Speaks (4:30pm)

EUR ECB’s Simkus Speaks (5:30pm)

GBP BoE’s Breeden Speaks (9:15pm)

EUR Industrial Production (Feb) (7pm)

EUR ECB’s Lane Speaks (10pm)

USD Empire Manufacturing (Apr) (10:30pm)

USD Fed's Williams Speaks (10:30pm)

USD Retail Sales (Mar) (10:30pm)

TUESDAY (16th April)

USD NAHB Housing Index (Apr) (12am)

USD Fed’s Daly Speaks (10am)

CNY GDP (Q1) (12pm)

CNY Retail Sales (Mar) (12pm)

CNY Industrial Production (Mar) (12pm)

CNY Fixed Asset Investment (Mar) (12pm)

GBP Jobs/Wages Data (Feb/Mar) (4pm)

EUR ECB’s Rehn Speaks (6pm)

GBP BoE’s Lombardelli Speaks (7pm)

EUR Germany ZEW Survey (Apr) (7pm)

CAD CPI Inflation (Mar) (10:30pm)

USD Housing Starts/Building Permits (Mar) (10:30pm)

USD Fed’s Jefferson Speaks (11pm)

USD Industrial Production (Mar) (11:15pm)

WEDNESDAY (17th April)

EUR ECB’s Villeroy Speaks (2:30am)

USD Fed's Williams Speaks (2:30am)

GBP BoE Governor Bailey Speaks (3am)

USD Fed's Barkin Speaks (3am)

CAD BoC Governor Macklem Speaks (3:15am)

USD Fed Chair Powell Speaks (3:15am)

EUR ECB’s Vujcic Speaks (4am)

NZD CPI Inflation (Q1) (8:45am)

JPY Trade Balance (Mar) (9:50am)

GBP CPI Inflation (Mar) (4pm)

EUR CPI Inflation (Mar F) (7pm)

GBP BoE’s Greene Speaks (10:05pm)

EUR ECB’s Cipollone Speaks (11pm)

THURSDAY (18th April)

EUR ECB’s de Cos Speaks (1am)

EUR ECB’s Schnabel Speaks (1:45am)

GBP BoE Governor Bailey Speaks (2am)

GBP BoE’s Haskel Speaks (4am)

EUR ECB President Lagarde Speaks (4am)

USD Fed’s Beige Book (4am)

USD Fed’s Mester Speaks (7:30am)

USD Fed’s Bowman Speaks (9:15am)

AUD Jobs Report (Mar) (11:30am)

JPY BoJ’s Noguchi Speaks (11:30am)

EUR ECB’s Guindos Speaks (5:15pm)

EUR ECB’s Nagel Speaks (10pm)

USD Philly Fed Outlook (Apr) (10:30pm)

USD Initial Jobless Claims (10:30pm)

USD Fed’s Bowman & Williams Speak (11:15pm)

FRIDAY (19th April)

USD Leading Index (Mar) (12am)

USD Existing Home Sales (Mar) (12am)

USD Fed’s Bostic Speaks (1am)

EUR ECB’s Centeno & Simkus Speak (3:30am)

EUR ECB’s Vujcic Speaks (5am)

USD Fed’s Bostic Speaks (7:45am)

JPY CPI Inflation (Mar) (9:30am)

GBP Retail Sales (Mar) (4pm)

SATURDAY (20th April)

GBP BoE’s Ramsden Speaks (12:15am)

USD Fed’s Goolsbee Speaks (12:30am)

EUR ECB’s Nagel Speaks (5am)

*Note, all times/dates provided are AEDT


Peter Dragicevich

Peter Dragicevich

Currency Strategist - APAC

Peter analyses and forecasts global macroeconomic trends to draw out possible implications for interest rates, commodity pricing, and the FX markets for Australia and across Asia.

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