The DXY is benefitting from a near 10% surge in Brent prices overnight, rising 0.2% to break above 101. US president Trump has announced that the US will reinstate a blockade of Iranian vessels transiting the Strait of Hormuz, while also demanding a 20% reimbursement fee on all other cargo passing through the water. Setting aside questions around US jurisdiction over the Strait, the move appears aimed at deterring Iran from asserting greater control over the Strait following an escalation in retaliatory strikes. We have been flagging risks of the strategic equilibrium evolving into a militarized Strait of Hormuz with constrained freedom of navigation. We thus maintain our view that oil prices will be volatile and structurally elevated. Oil sensitive Asian currencies, including the INR, IDR, and THB, may come under pressure today in response to the sharp rise in energy prices.
Short-term rates markets have shifted to price in a full rate hike from both the Fed and the ECB by September. Forward guidance by central bankers is becoming less definitive amid rapidly evolving geopolitical and energy market developments. Nevertheless, Fed Governor Waller noted overnight that the Fed may need to tighten monetary policy if US core inflation “comes in hot” this week. Currencies where monetary policy is lagging the global cycle could face depreciation as core rates rise, with CHF, CAD, and MYR being more vulnerable in this regard.
USD/KRW is holding around 1500 despite higher oil prices and a sharp fall in semiconductor stocks. There could be substantial capital flows into Korea following the US ADR listing of a Korean memory maker last Friday, given its large investment pledges to expand domestic manufacturing. A likely BOK rate hike this Thursday is also serving to provide additional support for the KRW, despite the negatives in energy and stock markets.
Quote of the Day
“The two most powerful warriors are patience and time.”
Leo Tolstoy
July 14 in history
New Zealand held its first election in 1853.
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