• Ongoing uncertainty. Weekend news the Strait of Hormuz has been closed dampened sentiment. USD a bit firmer. AUD gives back some ground.
• Volatile situation. More twists & turns likely. Impact on global economy still in its infancy. Q1 NZ CPI due (Tues). Global PMIs also out this week (Thurs).
Global Trends
Middle East related events have remained in the driver’s seat with the unfolding situation generating bursts of volatility. Risk sentiment was upbeat at the end of last week due to news the Strait of Hormuz had re-opened to commercial traffic. On Friday the US S&P500 (+1.2%) reached a fresh record high and European equities outperformed on the prospect of reduced downside global growth risks. Brent crude oil dipped under US$90/brl for the first time in over a month, bond yields fell as central bank expectations shifted, and the USD weakened. The mix of factors helped the NZD and AUD extend their respective upswings.
However, the positive vibes haven’t lasted. Over the weekend Iranian officials announced they had again closed the Strait of Hormuz because of the US naval blockade that remains in place. Reportedly, the US military is ready to board Iran-linked oil tankers and/or seize ships to exert more pressure on Iran to reopen the Strait. The latest reminder that the situation remains fluid and that a durable end to hostilities may not be quick/straight forward has weighed on risk assets in this mornings early Asian trade. Oil and gas prices have jumped with brent crude gaining ~6% (now ~$95.55/brl). US equity futures have opened lower (S&P500 futures -0.8%) and the USD has ticked up. EUR (the major USD alternative) has slipped towards ~$1.1740, USD/JPY has edged over ~159, while growth linked currencies like the NZD (now ~$0.5867) and AUD (now ~$0.7141) have lost some ground.
As discussed over the past few weeks, given the volatile nature of the participants involved more twists and turns regarding the Middle East conflict should be anticipated for a while yet. Moreover, the effect on supply-chains and global energy might take months/quarters to clear up, not days/weeks, even after more ‘normal’ operations resume. As our chart shows, tanker crossings in the Strait of Hormuz remain well below average. The conflict is set to cast a long shadow over the world economy with global growth set to be weaker and inflation higher than where it was predicted at the turn of the year. The latest global business PMIs (released Thursday), as well as CPI inflation figures for March from the UK (released Wednesday) and Japan (released Friday) could give a snapshot of some of the initial macro impacts. In our view, the still uneasy economic backdrop, coupled with the higher level of oil prices (because of the US’ swing to becoming a ‘net energy exporter’) may generate near-term support for the USD.
Trans-Tasman Zone
The evolving situation in the Middle East continues to generate market volatility. News that the Strait of Hormuz was reopening helped push the AUD and NZD higher at the end of last week. However, weekend developments have dampened the mood and taken a bit of the heat out of the NZD (now ~$0.5867) and AUD (now ~$0.7141) (see above). The AUD has also given back a little ground on a few of the major cross-rates after its strong run with falls of ~0.2-0.7% recorded against the EUR, JPY, GBP, CAD, and CNH. That said, much like AUD/USD, which is still near the top of its cyclical range, cross-rates such as AUD/EUR (now ~0.6069), AUD/JPY (now ~113.18), AUD/CNH (now ~4.8609), AUD/GBP (now ~0.5282), and AUD/NZD (now ~1.2166) remain at elevated levels.
The Australian data calendar is light this week, while in NZ Q1 CPI inflation is due (Tuesday). The RBNZ updated its near-term inflation forecast in April and is now expecting 3.0%pa in Q1. This is slightly above consensus projections. If realised, expectations the RBNZ may recalibrate its interest rate settings higher later this year could be reinforced, which in turn might generate some support for the undervalued NZD. Markets are pricing in a RBNZ rate rise by September with ~100bps of tightening discounted by March 2027.
For the AUD, global factors, especially events in the Middle East, and swings in risk sentiment will remain the guiding force. As mentioned above, the effects on the global economy, particularly on activity across Asia, are still in their infancy. In our opinion, given how much more RBA policy tightening is already factored into the Australian interest rates curve (another ~54bps of hikes are discounted by year-end), the underlying global growth headwinds, and with negative domestic consequences of higher mortgage rates and fuel costs in the pipeline, the AUD could struggle to add to recent gains. Particularly as a lot of ‘good news’ already looks baked in given the AUD is tracking ~1.5-2.0% above our ‘fair value’ estimates.
