OVERVIEW : Tuesday, August 25th, 26’
Markets turned more constructive on the diplomatic side, with reports of significant progress in the high-level talks in Tehran helping to push the geopolitical premium out of oil. Reports that Pakistan’s Army Chief Munir had conveyed a US offer to halt the naval blockade and ease sanctions in exchange for reopening the Strait of Hormuz added to the move, while further reports suggested a possible ceasefire could be announced in the coming days. That said, the headlines remain unconfirmed, with the US saying there are no ongoing or scheduled talks, while Iran also stressed that an understanding on Hormuz does not mean the Strait will reopen. Crude extended lower, with WTI and Brent selling off further as markets continued to price a better chance of de-escalation. Treasury yields moved lower across the curve, which weighed on the USD, with the softer rates backdrop adding to the pressure. Bessent’s reported comments around potentially responding to the bond-market “vigilantes” also kept the long end in focus. Overall, lower yields, weaker crude and the more constructive diplomatic headlines helped improve the broader tone, although the conflicting US and Iranian messaging means the move remains very headline-driven.
-
US DOLLAR
USD was firm in the early part of the day, with some initial demand across G10, but the move faded as more constructive US-Iran headlines started to come through and lower Treasury yields across the curve ultimately weighed on USD. Reports of progress in the Tehran talks and a potential deal around the Strait of Hormuz helped push the geopolitical premium out of oil, with WTI and Brent extending lower. Fed’s Collins remained relatively hawkish, saying inflation is still too high and highlighting concerns around the price-stability mandate, while also noting the labour market remains consistent with full employment and the economy is growing at a near-trend pace. US data was mixed, with weekly ADP employment running at 11.75K vs. 9.5K previously, while final July building permits came in slightly below expectations.
Data:
- US ADP Employment Change Weekly 11.75K (Prev. 9.5K).
- US Building Permits Final (Jul) 1.433M vs. Exp. 1.443M (Prev. 1.374M).
- US Building Permits Final (Jul MM) 4.3% vs. Exp. 5% (Prev. -2.6%).
-
EURO
EUR saw choppy price action on the day, ultimately closing flat, with the currency struggling to build any meaningful momentum despite a stronger German data set. German Ifo expectations, current conditions and business climate all beat expectations, while Q2 GDP was also revised higher on an annual basis. ECB policymakers were reportedly ready to raise rates in September, mainly to contain the inflationary side effects from the Iran war, although there is little appetite to signal further tightening beyond that. With the September hike already around 92% priced, the headlines and data failed to generate fresh demand for EUR.
Data:
- German Ifo Expectations (Aug) 89.1 vs. Exp. 87.5 (Prev. 86.7).
- German Ifo Current Conditions (Aug) 88.5 vs. Exp. 87 (Prev. 86.5).
- German Ifo Business Climate (Aug) 88.8 vs. Exp. 87.2 (Prev. 86.6).
- German GDP Growth Rate Final (Q2 QQ) 0.3% vs. Exp. 0.2% (Prev. 0.4%).
- German GDP Growth Rate Final (Q2 YY) 1.0% vs. Exp. 0.9% (Prev. 0.7%).
-
GREAT BRITISH POUND
GBP was firm in the early part of the day, with Sterling seeing some initial demand, but the move lacked follow-through as the market struggled to find a clear catalyst or direction. UK PM Burnham ruling out a general election this year provided little fresh impetus, while leaving the door open to potential tax increases in the Budget added some uncertainty around the fiscal outlook.
-
AUSTRALIAN DOLLAR
AUD outperformed on the day just behind the Kiwi, with the Antipodeans catching demand as the debasement trade remained on traders’ minds. The move picked up pace on the back of more constructive headlines and AUD remained supported into the upcoming CPI, with the market looking for headline inflation at 3.2% vs. 3.8% previously. Reaction to the August RBA Minutes was relatively muted, with the Board keeping the option of higher rates open if upside inflation risks materialise. Several members saw a possibility of inflation risks crystallising, although others pointed to offsetting downside risks, giving the RBA more time to leave policy unchanged and assess incoming data
-
CANADIAN DOLLAR
CAD was weighed on throughout the day, with the combination of escalating rhetoric around the failed US-Canada trade talks and a selloff across the crude complex putting pressure on the Loonie. Canadian Trade Official LeBlanc kept some hope of a deal alive, saying an agreement benefiting both sides remains possible, but also confirmed Canada will announce retaliatory measures. Canada is applying 15-50% tariffs on around USD 20bln of US products, while the government also announced a CAD 7.5bln support package for businesses and workers hit by the new tariffs. The deteriorating trade backdrop is starting to feed into the Canadian rate outlook, with JPMorgan seeing the latest developments reducing the likelihood of the BoC resuming hikes by early next year, while Scotiabank expects CAD downside to remain contained unless the trade situation deteriorates materially further.
-
NEW ZEALAND DOLLAR
NZD continued to outperform throughout the day, with constructive headlines and the ongoing debasement trade driving stronger demand for high-beta currencies. The Kiwi remained well supported as the broader risk tone improved, with demand continuing to build rather than fading through the day.
-
JAPANESE YEN
JPY continued to underperform on the day, with the low-yielding safe-haven struggling to attract demand regardless of the broader risk backdrop. The lack of interest in JPY on both risk-on and risk-off moves continued to highlight the currency’s weak underlying demand.
-
SWISS FRANC
CHF was subdued throughout the day, with the Franc only catching some demand as US Treasury yields sold off across the curve. Ultimately closing flat on the day.