4th June - Bump On The Road?
- 2 days ago
- 4 min read
Geopolitics
There were new but limited strikes in Iran yesterday, with the US launching strikes against Iran and Iran retaliating by launching strikes against Kuwait. Trump and his team are still claiming a deal could be reached as soon as this weekend, while also claiming Iran had agreed not to have nuclear weapons before noting "they can change their mind." This two-sided commentary and conflicting news reports added uncertainty to the overall picture, causing further rises in oil prices and giving markets as a whole pause for thought.
Yesterday saw capital flow away from risk-on assets, the first time we have seen this in a little while, potentially implying that the market is starting to accept the deal is not imminent and the potential is there that we may not have a resolution in the short term.
Forex
The USD once again was the main currency benefiting from safe-haven demand, seeing a bumper day where the DXY moved to the top of a recent channel it has been operating in, closing the day at 99.500. The USD has outperformed other safe-haven currencies since the start of the conflict, with one potential reason being that if the US were the ones who started the war, they would be the ones most in control, and so with the least risk of outside factors affecting it. In addition, and potentially the more important reason, is that the US is not as dependent on outside energy as its European and Asian counterparts. This has meant it has not been as sensitive to oil prices and so has been able to benefit when currencies like the JPY and CHF have struggled.
The USD/JPY continues to be the most interesting pair in the market today, having broken through the 160.000 last night before falling below it this morning. The key question remains if and when the BoJ will intervene again, as well as how much they are willing to intervene by. There were reports overnight that the BoJ is considering a June rate hike; the question is whether this is an attempt at a form of verbal intervention to suppress demand. If it is being considered, as there is still such a large gap between interest rates in the US and in Japan (3.75% in the US vs. 0.75% in Japan), the next question would be how much of an impact that would have in the long term. In the short term, the next day or two continues to be one to watch.
Outside of the USD, the EUR and GBP continue to be affected by external factors rather than internal ones. The EUR continues to see some mild support thanks to increasing rate-hike expectations from the ECB, while the political uncertainty continues to dissipate in the UK as Keir Starmer looks less likely to lose his position as each day goes by. These, however, are consistently overshadowed by the news from Iran and will continue to be so until a deal is signed.
The CHF and JPY continue to struggle, even as risk-off flows move into the USD. Both are affected by low interest rates causing a lack of demand, along with both being sensitive to increased oil prices. As a result, the USD is the standout option in terms of safe-haven assets and has been the one most people have chosen to invest in.
The AUD has continued to struggle as the price of precious metals continues to fall. As Australia is a key producer of these metals, it will continue to be strongly linked to both gold and silver. CAD was also moving in line with the commodity it is an exporter of, this time oil, as it saw oil prices give it a bid yesterday. As with the AUD, this relationship will continue to be key for the CAD as the world continues to focus on oil prices and the cost of energy.
Indices
Yesterday was the first day in close to two weeks where all three of the major US indices had a negative day. The FTSE 100 also saw a drop, with the Nikkei being one of the only major indices that made further ground higher. Yesterday was affected by the developments in the Middle East, with markets reacting to the new strikes. Today and tomorrow are now very important days to see how the market is now viewing the negotiations. Was yesterday a one-day hiccup, but the broad optimism remains and markets will recover to make more fresh highs? Or was yesterday the first day that the markets realized the deal being reached may not be so guaranteed, that they are no longer able to just ignore the delay and need to begin to price in the possibility of an extended conflict? Only time will tell, the warning remains though that there is still limited upside on good news and large downside for unexpected bad news.
Precious Metals
Gold and silver remain caught in the same situation as noted previously: higher oil leads to higher interest rates, affecting demand for non-yielding assets, while any safe-haven demand they could have received is going instead to the far healthier-looking USD. Both metals fell in price on the day, with gold down 1.23% and silver down 3.23%. The one glimmer of light for the metals could be found in tomorrow's NFP figures. There was a slowdown in the US labor market hinted at in the soft ADP and contracting ISM services numbers. If this trend continues in the NFP figures released, it could remove some rate-hike pressure from the metals and lead to some safe-haven demand going their way instead of the USD. It is worth bearing in mind for the remainder of the week, as unless something changes, the path remains short for both metals.
Today's Market Drivers
Iran - This will be no surprise to regular readers; updates to the Iranian situation continue to be the main driver of all markets.
BoJ Intervention Potential - If USD/JPY moves back above 160.000, potential BoJ intervention would move all JPY pairs and not just USD/JPY, so this remains one to watch.
USD Unemployment Claims - A weekly figure, so not as hard-hitting as tomorrow's NFP; nonetheless, it will help to build a picture of the US economy moving forward.
Comments