USD strengthens on geopolitical risks as oil offers CAD support – Scotiabank

The US Dollar (USD) is strengthening broadly on the back of geopolitical tensions as market participants respond to news of Israeli airstrikes launched against Iran, Scotiabank's Chief FX Strategist Shaun Osborne notes.

USD benefits from classic risk aversion

"The distribution of FX returns is one of classic risk aversion with underperformance from AUD and NZD, weakness in MXN and SEK, and losses for EUR and GBP. The weakness in classic havens CHF and JPY is somewhat surprising, despite their relative performance vs. G10 peers. The CAD and NOK are faring better, understandably, given their relationship to oil prices. The geopolitical situation remains worrisome and comments from President Trump have hinted to the possibility of additional airstrikes. Broader markets initially traded risk off but appear to be recovering somewhat, with equity futures retracing about half of their knee jerk decline as we head into Friday’s NA open."

"Treasury yields, meanwhile, have fully retraced their initial declines and are trading marginally higher vs. Thursday’s closing levels. The surge in oil prices is notable however, and oil prices are holding onto their overnight gains with WTI trading in the mid-$70s, a significant increase from Thursday’s close around $68/bbl and a meaningful departure from recent OPEC oversupply-driven lows just above $55/bbl. Copper is weak, reflecting the broader market’s tone of risk aversion and extending its recent bear reversal while gold has pushed to fresh local highs nearing the upper end of the flat range that has defined its price action since it reached its record high in late April."

"The focus for Friday’s NA session will remain centered on geopolitical developments and the possibility of escalation. In terms of data, the US will release preliminary UMich consumer sentiment data—a critical release ahead of next week’s FOMC. Policymakers have historically been sensitive to the data, and the figures present an even greater risk following this week’s disinflationary CPI and PPI as well as the worrisome jobless claims data that have revealed a continued deterioration in the US labor market. The Fed remains in its quiet period ahead of next week’s FOMC, however we note the potential for significant headline risk around the G7 leaders’ summit, scheduled for Sunday through Tuesday."