Markets are struggling to follow-through on yesterday’s risk on move sparked by President Donald Trump’s de-escalation pivot. Iran’s response will ultimately decide whether peak fear is behind us or still ahead. For now, Iran is signaling no appetite for a ceasefire and denied any direct talks with the US. However, Iran’s foreign ministry confirmed that mediation efforts were under way from “friendly countries”. Pakistan, Turkey, and Egypt have emerged as key intermediaries.
Interest rate differentials between the US and other major economies still anchors the DXY index within a 96.00-100.00 range. But until we reach peak fear around the energy shock, USD risks remain skewed to the upside driven by dollar funding needs in periods of financial market stress.
The flash S&P Global March PMI data offered an early read on how the Iran war is beginning to filter through major economies. The Eurozone composite PMI points to rising risk of stagflation in the coming months. The UK and Japan composite PMI show a marked slowdown in private sector growth and a sharp jump in input price inflation. Australia’s composite PMI dropped into contraction territory for the first time in 18 months while input price inflation surge to more than a three-year high. The US PMI is up next (1:45pm London, 9:45am New York).
JAPAN
USD/JPY is directionless just under 159.00. Japan inflation slows in February before expected to rebound in the months ahead. Both headline and core CPI ex. fresh food fell more than anticipated to near four-year lows at 1.3% y/y (consensus: 1.5%, prior: 1.5%) and 1.6% y/y (consensus: 1.7%, prior: 2.0%), respectively. The decline reflected the government's measures to reduce the household burden of higher energy prices. Excluding energy and fresh food, CPI dipped 0.1pts to a 13-month low at 2.5% y/y (consensus: 2.6%) but is still tracking above the Bank of Japan’s (BOJ) fiscal 2026 projection of 2.2%.
The solid results from Japan’s latest spring wage talks point to sticky underlying inflation and justify the BOJ resuming raising rates at the next April 28 meeting (25bps hike to 1.00% is 62% priced-in). Rengo members, Japan’s largest union federation, are demanding an average wage increase of 5.94% this year vs. 6.09% last year. This is the third straight year of worker’s pay gains demand exceeding 5%.
NEW ZEALAND
NZD/USD is trading on the defensive under its 200-day moving average (0.5864). RBNZ Governor Anna Breman discussed the impact of the Iran conflict on New Zealand. Unsurprisingly, Breman cautioned “we are likely to see higher headline inflation over the near term, and somewhat weaker growth momentum.” Breman also signaled that the bank will look through “a short-lived disruption and a temporary increase in petrol prices” but prepared to increase interest rates if the energy price shock is longer lasting. The RBNZ is poised to deliver a hawkish hold at its next meeting on April 8.
