The ongoing conflict persists in unsettling the global capital markets. The US dollar continues to exhibit strength, primarily staying within the established ranges observed in recent days. It appears poised to move higher against the Japanese yen, with the JPY158 level facing increasing pressure. Despite Japan’s dependence on imported oil and refined products, the yen remains the second-best performing currency in the G10 this week, down approximately 0.15%, trailing only the Canadian dollar, which continues to follow the greenback closely. The Australian dollar has underperformed, declining by 1.2%, while the Norwegian krone, an oil exporter, has decreased by approximately 0.9%. The bond market sell-off persists. Within the G10, the 10-year JGB has experienced the smallest increase, approximately nine basis points, whereas the UK Gilts and Italian BTPs have seen the most significant rise, nearing 25 basis points. In light of the varied performance observed in the Asia Pacific region today, it is noteworthy that equities have also experienced a sell-off this week. The Nikkei has declined by 6.6%, while Europe’s Stoxx 600 has experienced a nearly 5% drop. The S&P 500 enters today with a decline of just under 1% for the week, while the Nasdaq composite shows an increase of approximately 0.3%.

The euro is currently trading on the weaker side, yet it continues to stay within the range established on Tuesday, approximately between $1.1530 and $1.1705. The current trading range is approximately $1.1570 to $1.1620, remaining within the parameters established yesterday. Options for 1.5 billion euros at $1.16 are set to expire today. Initially, we focus on market positioning and momentum, while also acknowledging the significance of interest rate differentials. This week, the US two-year premium over Germany has contracted by a few basis points, now hovering around 135 bp, marking one of the lowest levels seen in recent months. The swaps market indicates a 75% probability of an interest rate increase occurring later this year. Despite the recent intervention threat from Japan’s minister of finance that kept the dollar in check around JPY158 earlier this week, the market remains poised for further developments. The dollar experienced a rebound from its three-day low around JPY156.45 during the local session yesterday, ultimately rising to JPY157.85 in the afternoon trading in New York.

The currency tested the level of JPY157.90 during trading sessions in Asia and again in Europe today. The trendline from the January highs (approximately JPY159.45 and JPY159.25) is currently positioned around JPY158.30. Support has been established in the JPY157.40-50 range. Sterling remained predominantly within the confines of Wednesday’s range (~$1.3305-$1.3405), which itself was situated within Tuesday’s range (~$1.3255-$1.3425). That said, it did experience a brief dip below $1.3300 as London desks were closing. The price action has remained within yesterday’s range thus far today, oscillating between approximately $1.3320 and $1.3380. The market perceives the uncertainty generated by the Gulf War as significantly altering the interest rate forecast. A week ago, the swaps market indicated a probability exceeding 85% for a BOE rate cut later this month. The current probability is approximately 15%. The premium on UK two-year bonds over US bonds increased to approximately 28 basis points, marking the highest level since mid-December of the previous year.

Despite yesterday’s 8.5% surge in April WTI, the Canadian dollar experienced a notable decline of approximately 0.35%, marking its most significant drop in nearly two weeks. In contrast to the inside days observed with certain other pairs, the US dollar fluctuated on both sides of Wednesday’s range yesterday. Despite intraday penetration, it once again failed to close above CAD1.37. The asset is experiencing a subdued trading range today, fluctuating between CAD1.3645 and CAD1.3680. Options totaling $400 million are struck at CAD1.3650, alongside an additional $520 million at CAD1.3670, both set to expire today. The Australian dollar fluctuated within Wednesday’s range (~$0.6985-$0.7085) yesterday, ultimately closing within that range. The next clear target is Tuesday’s low, approximately $0.6945. In muted trading, it has remained within the range of just under $0.7000 to nearly $0.7050 today.