- Iran/US tensions fueling risk aversion sentiment
- Oil prices choppy but trading higher
- US dollar opens higher against the G-7 majors.
USDCAD open: 1.3688, overnight range 1.3679-1.3803, close 1.3679, WTI 66.01, Gold 5033.91
The Canadian dollar continues to trade defensively as the greenback is underpinned by safe haven demand due to the increasing threat of a war between the US and Iran. The geopolitical tensions have relegated economic data to the back burner as traders have reduced risk into the weekend.
The Canadian dollar is also suffering because Canada and US 10-year interest rate spreads have widened in favour of the US.
Oil prices are chopping and trading with a bullish bias. Traders fear a price spike if US and Iran hostilities disrupt oil shipments through the Strait of Hormuz. WTI got an added boost after the Energy Information Administration (EIA) announced a 9.0 million barrel plunge in US crude inventories in the week ending February 13.
Canadian Retail sales are forecast at -0.5% m/m compared to 1.3% in November. The Industrial Product Price Index and Raw Material Price Index figures are also due.
The US dollar is closing the week on firm ground, having posted broad-based gains since last Friday, although it is still below where it was trading a month ago. Economic releases from Japan, the Eurozone, and the UK generated little follow-through in FX markets, which implies that today’s US Q4 GDP report, expected at 3.0% versus 4.4% in Q2, may also struggle to leave a lasting imprint.
Markets will also scrutinize January inflation data. The Fed’s preferred Core PCE gauge for Q4 is anticipated to moderate to 2.6% from 2.9% q/q. Meanwhile, Michigan Consumer Expectations and 1-year inflation expectations are forecast to remain unchanged at 56.6 and 3.5%, respectively.
Asian equity markets advanced in holiday-thinned conditions. Japan’s Topix climbed 1.18% and Australia’s ASX 200 added 0.88%, while Chinese markets were closed.
As of 7:45 am, Germany’s DAX is up 0.18%, the French CAC-40 had has gained 0.84%, and the UK FTSE 100 is up 0.51%. S&P 500 futures are down 0.19%, the US Dollar Index stood at 97.88, the 10-year Treasury yield is 4.061% and gold (XAUUSD) is 5022.62.
EURUSD bounced in a1.1744–1.1776 band. The pair failed to sustain gains from stronger Eurozone and German PMI releases. Manufacturing PMI improved from 49.5 to 50.8, moving back into expansion territory for the first time in four years, but the bounce faded as geopolitical tensions between the US and Iran resurfaced. A decisive move below 1.1720 would expose downside risk toward 1.1570.
GBPUSD is defensive in a 1.3435–1.3483 range. Sentiment is weighed down by concerns that US-Iran negotiations could deteriorate into a broader conflict. UK Manufacturing PMI printed at 53.9 compared with February’s 51.8, while Services PMI came in at 53.9 versus 54 previously. Expectations that the Bank of England will trim rates by 25 bps to 3.5% in March continue to limit upside momentum.
USDJPY firmed in a 154.89–155.64 range after Japanese inflation slowed to 1.5% in January from 2.1% in December, complicating the case for additional BoJ tightening. The pair also drew support from the prospect of higher oil prices should US-Iran hostilities disrupt supply flows.
AUDUSD dipped then climbed in a 0.7015–0.7067 range. Prices dropped on weaker Australian PMI data after February Composite PMI fell to 52.0 from 55.7 in January, Services eased to 52.2 from 56.3, and Manufacturing declined to 51.5 from 52.3.
