US
Brent crude oil prices are firm above $100 a barrel as the Iran war enters week three of President Donald Trump originally flagged “four to five weeks” military operation. USD pared back some of Friday’s strong gains, US stock futures are up, and bond markets have stabilized.
Tactically, USD can continue to benefit from haven bid driven by dollar funding needs until we reach peak fear regarding shipping through the Strait of Hormuz. Encouragingly, the Wall Street Journal reports that the US administration is working to form a multinational naval coalition that will escort ships through the Strait of Hormuz. The plan could be announced within days, though the timing of the escort operations remains fluid.
It’s also not clear which country will join that coalition. Australia has already ruled out sending warships, Japan said it has currently no plans to deploy naval assets for escorting vessels, and China suggested it would not sign up to the proposal. Still, NATO said some “individual allies are talking with the US and others on what more they might do, including in the context of security on the Strait of Hormuz.”
Second tier US economic data on deck today: March Empire manufacturing, February industrial production, and NAHB housing market index.
CANADA
USD/CAD dipped back under 1.3700. Canada February CPI is due today (12:30pm London, 8:30am New York). Consensus see headline CPI dropping to 1.9% y/y vs. 2.3% in January due to favorable base effects. Core CPI (average of trim and median) is expected at 2.35% y/y vs. 2.45% in January. For reference, the Bank of Canada (BOC) projects headline and core inflation to average 2.0% y/y and 2.5% y/y over Q1, respectively.
Canada’s stable inflation backdrop gives the BOC a small cushion to look through the oil-price shock and refrain from raising rates in the face of a worsening labor market. Canada’s economy lost -83.9k jobs in February vs. -24.8k in January, concentrated in full-time positions, and the unemployment rate rose 0.2pts to 6.7%.
CHINA
USD/CNH is holding under 6.9000. China’s January-February real sector data point to a solid start to the year, but higher energy prices are set to weigh on growth in the months ahead. Industrial production and retail sales grew more than expected, while Investment in fixed assets shifted from a decline to an increase. Excluding real estate development, fixed asset investment was up a solid 5.2% y/y vs. -0.5% in December.
China is particularly vulnerable to an energy price shock as its the world’s largest oil and gas importer. Moreover, 33% of China’s oil and 25% of its gas imports pass through the Strait of Hormuz. However, China’s massive oil stockpile (estimated to cover about 140 days of domestic import demand) and coal-heavy energy mix (coal accounts for 61% of China’s total energy supply) provide a meaningful buffer.
