Doubts that the US and its allies can secure shipping through the crucial Strait of Hormuz are sending renewed jitters across global markets. Brent crude oil prices surged back briefly above $100 per barrel after two oil tankers were struck south of Basra, Iraq. A container vessel was also hit north of Jebel Ali port in Dubai. The rebound in crude oil prices is weighing on bond and stock markets due to heightened stagflation risks and fiscal concerns. USD is holding near recent highs.
The International Energy Agency (IEA) agreement to release a record 400 million barrel (mb) of crude oil from its strategic reserves will do little to offset the disruption to supply flowing through the Strait of Hormuz. Nearly 15 mb/d of crude oil passes through the Strait or 10mb/day assuming alternative routes are used to capacity. As such, the IEA oil stock release covers roughly 27 to 40 days of supply disruption.
Currencies of economies with a heavy reliance on imported oil/natural gas and weak fiscal space remain the most vulnerable to a protracted disruption in energy production and shipping. The most vulnerable are Japan, India, South Africa, Turkey, Hungary, and Malaysia. The least vulnerable are Norway, Canada, and Mexico.
Most other economies are in the middle either because they are energy producers (US, Brazil, Australia) or have some fiscal flexibility (China, Sweden, Switzerland, New Zealand, UK, Eurozone, Chile, Peru). The EU is about to tap that fiscal lifeline as the European Commission is exploring price caps and subsidies to cushion the economy against higher energy costs.
In the short term, USD can continue to benefit from haven bid driven by dollar funding needs. Demand for short-term USD funding tends to spike during periods of stress due to the dollar’s dominant role in the global financial system (trade invoicing, cross border lending, global bond issuance, FX reserves). When stress hits, foreign market participants scramble for dollar to secure liquidity to roll over debt and meet liquidity needs.
Structurally, we remain bearish USD because of fading confidence in US trade and security policy, worsening US fiscal credibility, and the ongoing politicization of the Fed. The US Trade Representative's office initiated yesterday Section 301 of the Trade Act to bypass the legal constraint imposed by the recent Supreme Court (SCOTUS) tariff ruling.
The countries under investigations are China, the European Union, Singapore, Switzerland, Norway, Indonesia, Malaysia, Cambodia, Thailand, Korea, Vietnam, Taiwan, Bangladesh, Mexico, Japan, and India.
Second tier US economic data in the pipeline today: January trade balance, weekly jobless claims, January housing starts and building permits, and Q4 financial accounts.
