Dollar rallies on oil trade 📈 Alarming gains in USDJPY❗️

The Dollar Index (USDIDX) is gaining for the second consecutive session, adding another 0.15% an hour before the final Fed decision under Jerome Powell's leadership. The US currency is dominating almost the entire forex market today, with resistance seen only from the oil-linked Canadian dollar (USDCAD) and the Norwegian krone (USDNOK), which are currently trading flat.

Market Flees from Risk

The market has shifted to total defense and risk appetite has dropped sharply following new reports regarding the conflict in the Middle East. In an interview for the Axios agency, Donald Trump announced that he would not lift the blockade of the Strait of Hormuz until an agreement is reached that includes Iran's nuclear program. The US President reportedly rejected an Iranian deal proposal and suggested the possibility of resuming hostilities.

The return of Brent crude contracts (OIL: +6.4%) above the psychological level of $110 per barrel is hitting emerging market currencies hardest (e.g., South African rand, USDZAR: +1.8%; Hungarian forint, USDHUF: +1%).

Declines are also affecting G10 currencies. Losses are led by Antipodean currencies (AUDUSD: -0.75%, NZDUSD: -0.85%), ignoring, among other things, the rise in Australian inflation from 3.6% to 4.1%. EURUSD, CHFUSD, and GBPUSD are retreating by approximately 0.25%.

 The strong synchronization of oil prices and the dollar confirms the dollar's status as the most important safe haven, while simultaneously pointing to a risk of a correction on the USDIDX in the event of relief in oil prices. Source: xStation5. 

Yen Testing the Pain Threshold

Among classic safe havens, the Japanese yen received the biggest blow today (USDJPY: +0.5%). The yen weakened past the psychological barrier of 160 per dollar following the Bank of Japan’s April meeting, at which Governor Kazuo Ueda refrained from providing a clear sign concerning the timing of the central bank’s next interest-rate hike. Although the swap market is pricing in a 66% chance of a hike in June, the lack of hawkish communication from the BoJ has encouraged investors to further sell off the currency.

Japanese policymakers, led by Minister of Finance Satsuki Katayama, remain on high alert, warning of a response to "speculative moves" around the exchange rate. JPMorgan estimates that currency intervention could materialize before reaching the level of 162 per dollar, especially if the government decides to use the ongoing holiday period in Japan.

The widening "divergence" in bond yield spreads between the US and Japan for nearly a year partly justifies the Tokyo government’s concerns regarding the speculative nature of upward pressure on USDJPY. On the other hand, Japan—being close to the conflict, with high exposure to the risk of oil shortages and fragile economic growth—does not fundamentally support the yen, especially given the lack of decisive BoJ communication. Source: XTB Research.

The yen is the only G10 currency to have lost against the dollar this month. Source: XTB Research.

Aleksander Jablonski, XTB Quant Analyst