The Ceasefire Bolstered Confidence, And Commodity Currencies

Scoop

19 hours ago

The ceasefire between Israel and Iran captivated market attention last week. Risk appetite returned, and oil prices are back trading at levels seen prior to the conflict.
We may have avoided a spike in petrol prices, but Kiwi households are still having to contend with a lift in food inflation. The cost-of-living crisis was meant to end. But inflation is rearing its ugly head once again.
Talking currencies, our COTW looks at the highly unusual soft USD, in such an uncertain world. It has many talking about a new world order, and the end of the USD as a reserve currency. But we argue that we have NOT seen a material move out of USDs.
Here's our take on current events
Holding… holding… held. That pretty much sums up how we (and markets) were looking at headlines last week as news broke around a ceasefire between Israel and Iran – a truce 'orchestrated' by none other than President Trump himself. Despite a bit of a rocky start, the ceasefire continues to hold. The news bolstered risk sentiment, with equities rallying. Meanwhile, oil prices quickly unwound their recent spike and have returned to levels before the conflict broke out.
To be honest, market movements during this period of escalated conflict had been more subdued than what you may usually expect in times of war, and potential disruption to oil supply. Maybe it was the more targeted and localised nature of the conflict. Or maybe the broader macroeconomic fundamentals of weaker global growth (thanks to tariffs) tempering oil demand. It's most likely a bit of both. But we also think markets may be becoming a bit desensitised to the constant stream of risk events that define today's environment.
Meanwhile, movements across currencies continue to surprise us too. If we had spent the last 3 months deep in the Himalayan mountains, protecting endangered tigers, we would come out oblivious to market moves. If we were given the headlines only… we would have said the NZD should be in the low 50s (not 60s). Why? Well, a global trade war of such magnitude should hammer a (Kiwi) commodity currency. But it hasn't. A soft USD, highly unusual in such an uncertain world, has many talking about a new world order, and the end of the USD as a reserve currency (See our COTW for more).
We're facing into many headwinds. But we're steadfast in our forecast for the Kiwi. We're sticking with our call for 60c by year end. Yes, given our brave calls of the past and because the Kiwi is basically oscillating around 60c today, it sounds boring. But boring it is not. We expect to see a typically wide trading range around 60c. If downside risks dominate, we could see the Kiwi dip back below 57c. A move less likely with USD weakness. And then there are the upside risks… low in likelihood, but could see the Kiwi pop into the 62-63c range. So, there's something for importers and exporters… and both will get their chance to play.
Our forecast for 2026 sees a move in the Kiwi up towards 63c, as the global economy recovers (we hope) with further rate cuts delivered. That's our central scenario. Upside risks could see 65-67c (our 2027 forecast brought into 2026). But many are suggesting we're entering a very different world. And it's the beginning of the USD's end. That's hard to trade. Be sure to check out our latest FX tactical 'Vexing volatility, unusual uncertainty, & polarising protectionism' for more on our outlook on the Kiwi dollar and other key currency pairs.
Here at home, we may have avoided a spike in petrol prices like we saw in the fallout of the 2022 Russia-Ukraine war. But households are still having to contend with a recent pick up in food inflation as well as climbing energy bills, council rates and insurance premiums. In an op-ed in The Post, our Chief Economist Jarrod Kerr, penned his thoughts on inflation and the cost-of-living crisis.
'The cost-of-living crisis has ravaged discretionary spending. It has been a volatile, and gruelling few (too many) years. And lower income households have been hit the hardest. Sharp spikes in inflation act like a tax. Households are forced to spend more on essentials, and must then cut back on discretionary spending elsewhere. That hurts.'
Charts of the Week: It's a diversification. Not a dumping of dollars.
In this new world, searching for safer safe havens, we have seen a rebellious weakening in the USD. But the moves lack conviction. The USD DXY has traded as low as 97.90(ish), taking out the lows of 2023 and '24. Is that worrying? Not really. We were much lower over 2020-21, even lower in 2018, and much lower between 2005 and 2014 (averaging close to 80 in the DXY with lows as deep as 70). So, 97 isn't low. We are not seeing a dumping of dollars. What we are seeing is a mild diversification out of dollars and into assets like gold, currencies like the Euro, and more speculative assets that have the potential to disrupt, namely cryptocurrencies. And it must be said: Trump wants a weaker dollar. MACA: Make America Cheap Again.
The dollar is still the global reserve. If it was the end of USD dominance, we would see a much more meaningful flight out of US Treasuries. The bond market vigilantes have made much noise, but little movement. The US 10-year yield is stable around 4.4%, a level consistent with the economic environment plus a little term premium. The yield would have to be 100bps higher, around 5.4%, to get us worried, and convinced in de-dollarisation. And such a move out of dollars would see a far more aggressive flight into gold. US$3,365 per ounce sounds high, and it is historically. But if you truly want out of fiat currencies, it should be higher. Although Bitcoin has had a fair run, cryptos would also get more (consistent) interest without USDs.
The lack of conviction in the flight to safety trade may also reflect the fact that markets simply care less. Despite (depressing) headlines and daunting dealing room discussions ('are we on the brink of WWIII?'), financial markets are quizzically calm. There was more panic in the fallout of President Trump's Liberation Day back in April. The VIX – 'fear index – shot up above 50 for only the fourth time in history. In today's abnormal times, its back running at 'normal' levels.
Getting out of US dollars is harder than you think. The Euro has been an obvious (next largest, next best) option. But we must remind readers that it was only 12-14 years ago when we had the European debt crisis… remember Grexit? Serious strategists at the time were predicting the end of the EU altogether… a view many still think is inevitable without fiscal union. So, the EU has problems. Clearly the Swiss francs and Japanese yen hold dear to the hearts of panicked investors.
But they too have issues around the strength of their currencies at times… remember the Swiss dropping its peg in 2015? Now that's volatility. Yes, Francs always make sense, but to a point. So where else do you go? The British pound is an option… but they received a double notch downgrade in 2016 after Brexit. BRICS? Sure… but they've fallen around 30% in the last five years. And we only like the 'I' and 'C' in BRICS. So do you explore Asia? Yes, but slowly. We think the Chinese Yuan and Indian Rupee will have a much larger role to play in global finance… eventually. But they want weaker currencies.
It's hard when every country wants a weaker currency to help their exports. We can't all fall together. Because currency is a relative price… one goes down, the other up… and you need to find another safe home.