CACIB FX Daily - FJElite

Investors are nervously awaiting US-lran peace talks to be held over the weekend in Pakistan. President Donald Trump said that he is optimistic of a deal with Iran leading to cautious investor optimism ahead of the talks. At the time of writing, most Asian bourses and S&P500 futures were trading modestly in the green. Israel also agreed to curb its attacks against Hezbollah in Lebanon and to begin talks with Lebanon about disarming the group. Israel’s continuing attacks on Lebanon were threatening to break the ceasefire as Iran interpreted the agreement as including Lebanon. During the Asian session, the USD ground higher against the rest of the G10 bar the CHF and NOK. The verbal intervention by Japan’s Finance Minister Satsuki Katayama was taken up a notch but had little impact on the JPY.

The USD remains under pressure after the announcement of the conditional ceasefire between the US and Iran earlier this week. The USD weakness persists even though global energy prices have recouped some of the losses incurred in the immediate aftermath of the ceasefire announcement. Global stocks and bonds have lost ground again too, as concerns about the persistence of the stagflation shock seemed to linger.

The USD struggles in the face of lingering market anxiety and sticky oil prices have raised questions about the impact of the Trump administration’s policies on the currency. FX investors have long worried that the 'weaponisation' of the USD via tariffs and sanctions could push US trading partners to look for alternatives. There are now worries that the Iran war has shaken the confidence of Middle Eastern investors in the US and thus the USD. Furthermore, the combination of sticky US inflation and growing government expenditures (eg, due to military spending) could soon revive the topic of US debt sustainability, according to some clients.

We see the above risks as long-term USD negatives that warrant a cautious view on the currency in the coming years. In the interim, however, we still see the USD as the world’s preeminent reserve currency and doubt that Trump's policies would lead to a mass exodus from the USD. We further believe that the US would weather the global stagflation shock due to the war in Iran better than the economies of energy importers like the Eurozone, for example. This much could remain an important USD positive vs the likes of the EUR.

On the day, focus will be on the US CPI data for March and the preliminary University of Michigan consumer confidence index for April. Ahead of the inflation data, we and the market expect core CPI inflation to bounce to 2.7% YoY from 2.5% previously. At the same time, our US economist expects the University of Michigan confidence index to prove more resilient than expected and soften only marginally to 53.0 from 53.3, vs consensus expectation of 51.5.