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The DXY Index declined by 0.65% to 99.70 overnight, reversing Friday’s 0.62% rise to 100.35. First, the market is testing a theory that international resistance can quarantine a conflict. Just as countries refused to engage in a tit-for-tat trade war after the "Liberation Day" shock, they are now refusing to be drawn into a military escalation in the Persian Gulf. Second, having considered the US Supreme Court’s ruling against Trump’s IEEPA tariffs as the off-ramp for the trade war, markets are now considering whether the International Energy Agency (IEA) reserve release and allied refusal to escalate can also serve as off-ramps for the Iran conflict. The hope is to survive the 120-day delivery window of the strategic oil without the war expanding.
President Donald Trump’s latest demand for a seven-nation naval coalition to police the Strait of Hormuz has met a wall of resistance. Prime Minister Sanae Takaichi stated that Japan has no plans to dispatch escort ships, choosing to act independently within a legal framework rather than under a US military umbrella. Despite being a staunch ally, the Australian government has explicitly ruled out sending ships. British PM Keir Starmer is focusing on "ending the disruption" through diplomacy rather than joining offensive strikes. By refusing to join, these countries are preventing the war from becoming a "global versus Iran" conflict, effectively keeping the fire contained to a US-Israeli operation.
The IEA’s largest intervention helped to defuse Monday’s initial attempt by oil prices to resume their climb; Brent ended the session 2.8% lower near USD100 per barrel. The IEA coordinated member nations to unanimously agree to release a record 400 million barrels from strategic reserves. Supplies for Asia, the most vulnerable region to oil price spikes, began flowing on March 16. Barrels for Europe and the Americas are scheduled for late March. Iran has reportedly allowed Chinese-flagged vessels or those with special coordination to continue loading oil, bringing some sense of relief that Iran has not completely cut off its exports.
In Japan, Finance Minister Satsuki Katayama has significantly intensified verbal intervention efforts, characterizing the JPY’s recent depreciation as speculative and disconnected from economic fundamentals. Expressing a "strong sense of urgency," Katayama highlighted the adverse impact of a weak currency on domestic livelihoods and the cost of living, signalling that authorities are prepared to take "bold measures" to curb excessive volatility. This shift in rhetoric comes as the JPY approaches the critical 160 level against the USD, bolstered by rising energy costs, which led to regional cooperation with South Korea to address currency weakness. Consequently, markets remain on high alert for direct Ministry of Finance intervention should verbal warnings fail to stabilize the exchange rate ahead of the Bank of Japan policy meeting and Prime Minister Sanae Takaichi’s visit to Washington later this week. USD/JPY remains supported around 159 after hitting the year’s high of 159.75 last Friday. It needs a sustainable break below the trendline support at 158.80 before considering a retracement of the rise from the 152.25 low on February 12.
Ultimately, a sustained cooling of Middle East tensions is a prerequisite for markets to pivot their full attention back to the many central bank meetings this week – the Reserve Bank of Australia today, the Fed and Bank of Canada on Wednesday, and the Bank of Japan, Bank of England, European Central Bank, and Swiss National Bank all on “Super Thursday.” The geopolitical premium currently embedded in the USD is vulnerable to monetary policy divergences that price in 1-2 rate cuts by the Fed vs. expectations of a pause or rate hikes at other central banks. However, volatility can also increase again from any angry response from Trump against allies pushing for a diplomatic solution to the Iran conflict, with a breakdown in Western unity re-igniting a flight to safety.
Quote of the Day
"I dream of painting and then I paint my dream.”
Vincent Van Gogh
March 17 in history
At a show in Paris in 1901, 71 of Vincent van Gogh's paintings caused a sensation 11 years after his death.
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