The main news is that there is no news. The market has been anticipating a deal to reopen the Strait of Hormuz but, about a week after the “within the next day or two” timeframe, there is still no agreement and there may never be one. The demands Iran outlined over the weekend as conditions for allowing the safe passage of shipping through the strait — including the withdrawal of US military forces, the end of all sanctions, and payment of war reparations — are a non-starter for any US agreement.
President Trump’s latest strategy appears to be “low-keying it”, buying time without further military strikes and thereby increasing economic pressure on Iran to capitulate, given the successful US Navy blockade currently in place. Satellite images show that during the first nine days of August, no supertankers were visible at Kharg Island, Iran’s main oil export facility. Trump posted on social media with a counterargument to Iran’s plea for compensation, demanding compensation from Iran for all the bombings and killings it has carried out over the past five months and, indeed, over the past 50 years.
In the absence of any positive headlines on negotiations to reopen the strait, pressure on oil prices has been upward. Brent crude is up for a fourth consecutive trading day, reaching USD87.80 per barrel, 5% above the weekend close. European natural gas prices are up 11%.
Upward pressure on energy prices has spilled over into global bond markets. US Treasury yields are up 4–5bps across the curve, with the 10-year rate reaching 4.70%. European rates show a similar move.
In currency markets, the low-volatility backdrop has continued, with insignificant net movements from last week’s close apart from further yen weakness, as the effect of official intervention at the end of July continues to fade. USD/JPY has broken above 159, erasing about half of the yen’s gains from the latest round of intervention.
In the overnight trading session, the yen temporarily strengthened after Kyodo News reported that the unprecedented joint US-Japan intervention was prompted by Governor Ueda’s “strong indication” at his press conference that the policy rate would be raised soon after September. The US side reportedly welcomed that signal, with one senior official quoted as saying the BoJ now has no choice but to raise interest rates at its next meeting in September. The market reaction to the story quickly faded. Markets already price a full BoJ hike by October, with more than a 60% chance that the hike occurs in September.
The NZD has traded in a range of less than 25 pips since the new week began and currently sits toward the bottom end, just above 0.5880. The only notable move on the crosses is a stronger NZD/JPY rate, which has risen to 93.6. The AUD is at 0.7055 and the NZD/AUD cross is steady at 0.8335.
Equity markets show modest movements. The S&P 500 is close to flat, while underperformance in the tech sector has resulted in a modest fall in the Nasdaq index. European markets were flat.
In the domestic rates market, global forces from Friday night’s offshore trading session supported a move lower in rates. Swap rates fell 2–3bps on the day, while NZGB yields were marked down 2–4bps across the curve. The move should reverse today, with Australia’s 10-year bond future up 4bps in yield terms since the NZ close.
The key event on today’s economic calendar is the RBA’s policy update. The market ascribes little chance to a rate hike and Bloomberg’s survey shows no economist picking a rate change, although one market economist writing in the AFR yesterday saw the prospect of a surprise rate hike in a 4-3 vote. Most expect no change and a tightening bias to remain.
There are only second-tier data releases, including NAB’s business survey and, in the US, the NFIB small business survey and existing home sales.
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Jason Wong is the senior Markets Strategist at BNZ Markets.
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