In currency markets, the US dollar is the clear winner, retaining its safe haven status during times of geopolitical turmoil. More generally, US assets are outperforming the rest of the world's assets, reversing the Sell America trade that emerged after last year's tariff shocks. The Canadian dollar has emerged as another clear winner in this turmoil, benefiting from Canada's geographical isolation and its status as an energy exporter. The Norwegian krone (also an oil exporter) and the Swiss franc (a safe haven) also joined the dollar at the top of the currency performance table last week.
Next week's economic and policy calendar is light, developments in the Iran war should be far more critical for markets. A longer war, higher energy prices and disrupted supplies will hurt energy-importing economic areas the most, particularly China and the Eurozone. Conversely, energy producers far from the conflict like Canada, Norway and Latin America, would benefit. These are exactly the moves we have seen in currency markets so far.
GBP
The UK is not quite as dependent on energy imports as the Eurozone. Markets rewarded the Pound with a nice bout of outperformance relative to the Euro, though it couldn't quite keep up with the dollar. Further, the general repricing of interest rates, driven by the sharp rise in energy prices, means the Bank of England is no longer expected to cut rates this year. This highlights the significant interest rate advantage of Sterling relative to the Eurozone. The rally's durability against the euro will depend on the war's length, as political risks from Starmer's left remain a significant factor.
EUR
The reversal of the 'Sell America' trade, driven by safe-haven flows, has not been kind to the Euro, which has fallen near the bottom of its trading range of the last few months. Even before the impact of the energy shock arrives, February inflation surprised significantly to the upside. Our view that the next ECB move will be a hike has been vindicated, and now a full hike is priced before year end in response to these inflationary developments. We will pay close attention to business surveys to gauge the impact of the Iran war shock, as a stagflationary environment once again looks like a real possibility for the Eurozone.
USD
The February payroll report was quite weak, a mirror image of the strong January one. There was net job destruction and an uptick in the unemployment rate, both data points reversing January gains. Markets mostly ignored the data because they are focused on the Iran war. However, we note that this weakness seems to contradict strong data elsewhere, making us increasingly skeptical of the quality of the surveys on which it is based. More than a full Federal Reserve interest rate cut is still priced in for 2026. This week's February inflation report will not yet reflect the recent sharp increases in energy prices, but it nevertheless will be important as attention shifts from growth to renewed upward price pressures caused by the war.
