OVERVIEW : Monday, August 31st, 26’
Markets turned more defensive as US-Iran tensions escalated over the weekend, with US forces striking IRGC missile and minelaying capabilities on Larak Island, prompting Iran to retaliate with missile and drone attacks against US and regional military targets. Iran also reported striking a tanker with mines, downing a US drone and targeting US vessels, while further retaliation was threatened. The escalation extended into the Red Sea, with Yemeni armed forces reportedly targeting Saudi ships. Crude complex extended gains, with the harder rhetoric from both sides keeping the geopolitical premium elevated and pushing oil higher. Trump was reportedly weighing limited strikes. At the same time, Trump said any strikes would be limited and that the Strait of Hormuz remained in good shape, with oil still flowing and ships moving through with Navy assistance. Separately, Bessent called for the G20 to reassess trade terms with China, pointing to the country’s USD 1.2tln trade surplus.
-
US DOLLAR
USD remained on the backfoot throughout the trading sessions, with light calendar starting off the trading week. Geopolitical tensions between US and Iran continued to drive the sentiment, however USD closed as the clear laggard on the day, catching no demand ahead of the tier 1 data later in the week. On the other hadn, Goldman Sachs still expects Fed to hold rates in September despite Warsh’s hawkish stance. Goldman Sachs chief economist Jan Hatzius said Federal Reserve Chair Kevin Warsh’s Jackson Hole speech was his most hawkish address as chair, but argued the remarks alone are unlikely to lead to a rate increase at the September meeting.
-
EURO
EUR remained well supported on the day, continued to benefit on the back of the softer US Dollar. German CPI YoY for August was slightly cooler than expected, but higher than previous, with no effect on the single currency. Attention now turns to Eurozone Inflation data tomorrow morning, where the majority of banks are expecting higher than expected 3.2% print.
Data:
- German CPI Prel (Aug YY) 2.9% vs. Exp. 3.0% (Prev. 2.8%
-
GREAT BRITISH POUND
GBP had a choppy price action on the day as the UK bank holiday resulted in thin volume affecting flows in sterling
-
AUSTRALIAN DOLLAR
AUD like its antipodean peer Kiwi had a subdued performance on the day amid geopolitical escalation rhetoric weighed on demand for risk assets. Overnight, there were weak Chinese PMI metrics, raising hopes of possible Chinese stimulus
-
CANADIAN DOLLAR
CAD has outperformed on the day affected primarily by the rising oil prices on the back of the renewed strikes in US/Iran conflict. BoC is widely expected to remain on hold this week, so there should be no surprises at the Wednesday’s meeting.
-
NEW ZEALAND DOLLAR
A full hike is now priced in for Wednesday’s RBNZ meeting, with focus turning to forward guidance.
-
JAPANESE YEN
JPY was supported on the day on the back of a weaker USD, with the Yen ultimately closing marginally firmer. The domestic data also provided a constructive backdrop, with July industrial production rising 0.1% M/M vs. -0.6% expected, while retail sales jumped 4.0% Y/Y vs. 3.0% expected, giving JPY some additional support.
Data:
- Japanese Industrial Production Prel (Jul MM) 0.1% vs. Exp. -0.6% (Prev. 1.9%)
- Japanese Retail Sales (Jul YY) 4% vs. Exp. 3% (Prev. 0.6%)
-
SWISS FRANC
CHF lacked any meaningful demand on the day, closing on the weak side, with SNB's Tschudin comments saying “more willingness to intervene on FX if needed” did not help either.