The dollar was stronger across the board yesterday as investors reacted to the surge in energy prices. One of the biggest intraday moves occurred when headlines broke of Qatar suspending gas production after an Iranian attack on its facilities. As our commodities team notes, the gas market went into this conflict tighter than the crude oil market and thus is more susceptible to larger price spikes.
The focus will now be on whether Iran can escalate its attacks on the production facilities of the region’s key marginal energy suppliers. For gas, that looks like a Qatari story, while for crude oil, the focus is on Saudi Arabia, the UAE and Iraq. In addition to the production facilities, the market will be waiting for news about the Straits of Hormuz. While the sense is that the US and Israel have the military might to restore some sense of order in the coming weeks, FX traders will remain transfixed on gas and oil prices. The longer they stay elevated, the more the external accounts of the oil importers are damaged and the greater the drag on global growth from elevated inflation and curtailed monetary easing cycles.
For FX markets, this continues to look like a tale of the haves and the have-nots when it comes to energy independence. Our Asia team discusses local energy independence here, while Europe is also on the wrong side of the ledger. The dollar looks the best currency to take advantage of this energy shock, as we discussed yesterday, but other big natural gas exporters like Australia and Norway are seeing their currencies outperform too.
And given investors went into this crisis with large overweight positions in Europe and emerging markets – in currencies and equities – both currency blocs look susceptible to further unwinding should energy prices stay high. So, unless someone like China, a huge buyer of Iranian crude, can convince Iranian forces from attacking production facilities and threatening shipping, we expect European and EM currencies to stay vulnerable. For reference, European natural gas futures have just re-opened back near their highs.
There is little US data of note today, and we have a speech from the Fed’s John Williams at 15:55CET. He sits at the doveish end of the spectrum. But any concern over sticky inflation could add to this week’s upside pressure on short-dated US rates and lift the dollar further.
DXY looks likely to stay bid in the near term. 99.50/100.00 looks like the target whilst energy prices remain bid.
Chris Turner