The Vise Tightens

Forex

US (American Dollar)

The geopolitical context remains fairly unchanged for some weeks now, with persistent uncertainty and White House statements that are as reckless as ever. That said, the energy independence of the United States makes the dollar more than solid in investors’ eyes; with the war in the Middle East having installed a risk-off atmosphere, the greenback can only appreciate.

Over the coming weeks, US employment and inflation data will be closely watched given the Fed’s tone. Indeed, in the market we see heightened attention to employment data (Non-farm Payrolls). A solid labor market would allow the Fed to keep rates high and thus limit inflation driven by the energy shock, even though the United States is better shielded against the latter due to its energy independence.

Obviously, the price of FX options rose, owing to the various risk premia during this 4-day weekend, thus increasing the uncertainty related to the Iranian conflict.

Our view on the dollar remains fairly optimistic, given that the conflicts have not seen too significant a slowdown in recent days. On the other hand, volatility remains worth monitoring across the various markets such as the S&P 500 or EURUSD.

EUR (Euro)

As for the euro area, we are still roughly in the same conjuncture as before. Nevertheless, the cost of oil seems to persist at very high levels… Europe, a net importer of energy, is going to hurt… very badly. The cost of living for the various euro-area countries is going to soar. Given that Europe had the wonderful idea of scrapping nuclear power and switching to coal in Germany, and that France is doing the same … (not coal, but magnificent wind turbines), our energy independence is close to zero in this time of crisis.

Prepare your precautionary liquidity, because you may well need it in the near future.

Nevertheless, in a short-term view, the interest-rate spread between the ECB and the Fed, if the ECB were to raise rates to counter energy-cost inflation and thus general inflation, could benefit the euro, which would appreciate and therefore reduce the cost of imports, hence the cost of imported energy. But in a longer-term view, this energy shock would catch up with us, whether in France, with overly high taxation on the price of fuel, or in the impact of euro appreciation on the competitiveness of our economic zone vis-à-vis foreign producers.

The view on the euro remains convoluted, given the ECB’s hawkish pivot (a policy aimed at countering inflation) and the still-ongoing conflicts in the Middle East.

JPY (Japanese Yen)

The yen is under massive pressure, flirting with the 160.00 threshold against the dollar. Unlike the other G10 central banks, the Bank of Japan (BoJ) is perceived as being “behind the curve” because of its strongly negative real interest rates.

The market anticipates a direct intervention in the FX market potentially to the tune of 100 billion dollars, financed by the liquidation of US Treasury bills, which could worsen the rise in global bond yields.

The situation illustrates the mechanism of monetary “catch-up.” While the Fed and the ECB have already begun or stabilized their tightening cycle, the BoJ must adjust its policy to avoid an uncontrolled depreciation.

According to uncovered interest rate parity (UIP), as long as the real rate differential remains largely unfavorable to Japan, selling pressure on the JPY will persist despite intervention threats.

The minutes of the March 18-19 meeting revealed debates over a 50-basis-point hike, signaling a more aggressive hawkish turn than expected. A positive surprise in the Tankan survey could validate this trajectory and offer structural support to the yen.

Our view for the yen: it could continue to depreciate while awaiting BoJ measures (cf. PTI), but be careful nonetheless of Japanese announcements and data that could provide more information on monetary policy than what we already have in hand…

Commodities

OIL / BRENT: Price stabilizes around 100 $

Update on the situation:

The Gulf countries are reassessing massive pipeline projects to bypass the Hormuz choke point in the face of the threat of permanent Iranian control. Construction costs estimated between 5 and 20 billion USD, security risks (militants, mines), and the need for unprecedented cross-border political cooperation. Saudi Arabia’s East-West pipeline (1,200 km) has become a vital strategic asset, carrying 7 million barrels per day to the port of Yanbu on the Red Sea.