Global growth slowdown to weigh on commodity FX

USD: Commodity FX underperforming amid peace deal optimism

The major foreign exchange rates have remained stable overnight as market participants wait to see if there is any progress in talks between the US and Iran to end the conflict. The price of oil has settled back at closer to USD100/barrel for Brent which is currently in the middle of the USD80–USD120 per barrel range that has been in place since the Middle East conflict started in late February. It has been reported overnight that the US has drafted a 15-point plan intended to bring the conflict to an end according to people familiar with the matter. The plans were reportedly delivered to Iran via Pakistan, and have been worked on by Jared Kushner and Steve Witkoff. Iran reportedly has 24 hours to respond to the plan. The US demands for Iran reportedly include: i) it must dismantle existing nuclear capabilities, ii) it must never pursue nuclear weapons, iii) the Strait of Hormuz must remain open and function as a free maritime corridor, iv) it must abandon its regional proxy paradigm, and v) it’s missile program must be limited in both range and quantity. In return, Iran would: i) receive full lifting of sanctions imposed by the international community, and ii) the US would assist Iran in advancing its civilian nuclear program. It now remains to be seen whether Iran would agree to the maximalist demands from the US.             

At the same time, it has been reported that the Pentagon is planning send more troops to the region. The WSJ reported that the Army’s elite 82^nd Airborne Division will be deployed to support operations in Iran which is made up roughly of 3,000 soldiers. The report adds that a decision to put boots on the ground in Iran has not been made but the movement of the 82^nd Airborne division opens the door for President Trump to try to reopen the Strait of Hormuz by force, seize Iran’s strategic islands or coastline, or launch a mission to capture the regime’s highly enriched uranium should he choose to do so. In addition, the New York Times has reported that Saudi Crown Prince Mohammed bin Salman sees a “historic opportunity” to remake the region according to people briefed by US officials, and has been pushing President Trump to continue to the war with Iran to remove the hardline government. The report has been dismissed by Saudi officials who emphasized that Saudi Arabia has always supported a peaceful resolution to this conflict. The developments still highlight the risk that the Middle East conflict could escalate further.

The US dollar has softened over the past week reflecting in part investor optimism over a quicker end to the conflict. The G10 commodity currencies of the Norwegian krone, Australian dollar, Canadian dollar and New Zealand dollar have all underperformed alongside the US dollar which could be an early indication that market participants are becoming more concerned over downside risks to global growth from the energy price shock. The price of copper which is viewed as an important gauge of global demand has fallen sharply over the past week to its lowest level since late last year.            

G10 COMMODITY CURRENCIES VS. COMMODITY PRICES

Source: Bloomberg, Macrobond & MUFG GMR

EUR & GBP: PMIs highlight growth risks as central banks consider rate hikes

The negative impact of the energy price shock for European economies was evident yesterday in the releases of the latest PMI surveys for March. The euro-zone composite PMI revealed that business confidence dropped sharply by 1.4 point to 50.5 in March. It was the lowest levels since May of last year, and more consistent with the euro-zone economy moving closer to stagnation. Business confidence would have fallen even further if the manufacturing PMI had not been supported by an increase in delivery times. Businesses also reported that input prices are surging but have not yet  fed through to output prices. The composite input price sub-component jumped sharply higher by 6.5 points to 65.5 in March while the composite input price sub-component increased by only 0.8 point to 53.9. It was the highest input price reading since the start of 2023 during the last energy price shock triggered by the Ukraine conflict. A similar picture was evident in the UK as well. The UK composite PMI fell even more sharply by 2.7 points to 51.0 in March.

Softer growth momentum in Europe should help to dampen market expectations for more aggressive rate hikes from the BoE and ECB, although they are likely to respond by raising rates if the inflation shock proves more prolonged. The release of the latest inflation data from the UK today for February prior to the energy price shock revealed that core and services inflation remained well above the BoE’s target at 3.2% and 4.3% respectively. Both the euro-zone and UK rate markets are currently pricing in hikes from the BoE and ECB as soon as at their next policy meetings in April. In this regard, market participants will be listening more closely than normal to any guidance today from ECB President Lagarde and/or ECB Chief Economist Lane who are both speaking at their own Watchers Conference. While faster hikes from the BoE and ECB may offer some near-term support for the euro and pound by lifting yields, those gains could ultimately prove short-lived if tighter monetary policy alongside higher energy prices trigger a deeper economic slowdown/recession for European economies.

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com