The FX Trader: A fragile Iran war ceasefire sees robust USD sell-off.

The latest

Risk sentiment surged and the US dollar weakened sharply in early Asian hours Wednesday after President Trump announced a two-week ceasefire to negotiate terms with Iran, just hours after maximalist threats against Iranian infrastructure and even its entire civilization. The currencies benefitting the most were the most classically pro-cyclical, including the Swedish krone and the Australian dollar.

It is difficult to determine the quality of the ceasefire, which appears fragile for now, but the scale of the market reaction suggests that the market believes that Trump is desperate to extract the US from this conflict. Importantly, while Trump declared that the cease-fire is contingent on Iran “re-opening” the Strait of Hormuz, some Iranian sources have claimed that it will only allow 10-20 ships to proceed through the Strait daily (normal pre-conflict traffic levels were well over 100 per day) and only on the condition that tolls are collected. In any case, traffic through the strait continues to run at very low levels. Traffic normalization through the strait is a pre-requisite for avoiding extensive further damage to the global economy, cease-fire or no cease-fire.

So where do we go from here? The unfortunate fact of life remains that headline risk is extremely pronounced. Either side could declare that the terms of the cease-fire are being violated and renew hostilities could resume that prompt the other side to escalate. But with a US president so clearly motivated to see oil- and stock prices normalize further, Iran may play along for at least this two-week negotiation window.

The loudest signal is USD weakness, with EURUSD breaking above the recent range highs  - see below. Risk sentiment will need to continue to stabilize to see a sustained move lower in the greenback, as it wouldn’t take much of a reversal from here to throw everything back into uncertainty.

Another dramatic move was the sharp reversal in EURSEK, which briefly pumped higher through 11.00 and even 11.05 late yesterday before getting slammed all the way back below 10.80 (!) as of this writing. The Swedish krone is traditionally very sensitive to the growth outlook for Europe and NOKSEK has looked like a proxy for oil and gas prices in Europe since the conflict broke out and the huge move in that cross may have amplified SEK moves more broadly.

RBNZ with a “hawkish hold”. Not really much in RBNZ’s meeting overnight as no change was expected to the 2.25% official cash rate, but Governor Breman said that a “relatively early” rate hike was discussed if not acted on. NZ short rates fell less than short rates elsewhere and AUDNZD, after briefly spurting to a new post-2013 high north of 1.2200 in very early hours Wednesday in Asiao after the meeting, fell sharply to below 1.2100 as of this writing – a possible sign of exhaustion in the bull trend for that cross.

Chart focus: EURUSD
While risk sentiment bottomed out on the last couple of days of March, EURUSD was somewhat divergent, not testing the 1.1411 lows from earlier in the month. Now it has broken above the 1.1667 range high that was established after the initial sell-off on the breakout of the Iran war. It’s important for USD bears to hold the level above perhaps the 1.1625-50 area to keep the focus on a full reversal of the sell-off that was initiated from the 1.1800 area, which now must be re-taken to neutralize the entire sell-off sequence since the Iran war began.