Measures by global authorities to limit the rise in energy prices have so far had little effect on the market. These measures include a 400 million barrel release by IEA members and, now, the US Treasury’s formal approval of the sale of Russian energy products until 11 April. The reality is, however, that it is impossible to replace the 20m barrels per day of crude being shut-in by the military conflict in Iran. Brent remains stubbornly above $100/bl as the US and Israeli militaries fail to prevent attacks on oil tankers moored in the region. Investors are now bracing for multi-month disruption. Ten days into the war, on 10 March, investors were attaching a 79% chance that traffic in the Straits of Hormuz would return to normal by 30 April. That chance is now priced at just 44%. The market probably has little confidence that Iran can be bombed into submission and instead will be looking for any paths to a halt in hostilities, be that through a ceasefire or Washington declaring mission accomplished.
Away from the Middle East, today’s US data should also feed into this month’s hawkish re-pricing trends of central bank policy. The Fed’s preferred measure of inflation, the core PCE index, is expected to rise to 3.1% year-on-year in January. This hit a low point of 2.6% last summer and has since been trending away from the Fed’s 2% target. This limits the ability of the Fed to cut rates this year, and we will hear a lot more from the Fed at next Wednesday’s FOMC meeting. Today will also see the release of US job openings data for January. We doubt any surprisingly soft reading will weigh on expectations for Fed policy or the dollar for long today.
Yet this month’s dollar rally has not been driven by interest rate differentials, but by the macro fallout of higher energy prices. Here, European and Asian equity benchmarks have been marked 6-7% and 8-9% lower, respectively, this month. The US S&P 500 and the Nasdaq are off just 3% and 1.5%, respectively, as US energy independence cushions US markets. We doubt these trends will change until energy starts flowing in the Gulf again.
The DXY is pushing to new highs for the month today and looks to have its sights set on last summer’s high in the 100.25/35 region. We cannot see investors wanting to fight this dollar rally, given there is so little certainty as to when this crisis will end. And traders, once again on a Friday, will not want to run any short dollar balances ahead of the weekend event risk.
Chris Turner