A Barrel of Relief

Falling oil prices should ease pressure on global bonds and limit the dollar’s rally, although US growth and foreign demand for US securities continue to support the currency.

• Reports that US and Iranian negotiators were considering a seven-day agreement to reopen the Strait of Hormuz stalled the rise in crude prices and helped relieve the bond sell-off.
• Foreign investors accumulated $1,754bn of long-term US securities in the twelve months to July, more than twice the $743bn US trade deficit, indicating strong underlying demand for the dollar.
• USD/JPY fell below its 200-day moving average at 158.47 after Japanese officials criticized yen weakness, but the US-Japan policy-rate gap remains wide at 3.75%-4.00% versus 1.25%.
• Political intervention risks and Japan’s combination of loose fiscal and tight monetary policy offset the support from the yield gap; BBH expects USD/JPY to remain between 155.00 and 160.00 in the near term.
• Banxico kept its policy rate at 6.50% for a third consecutive meeting, while the swaps curve still prices nearly 125 basis points of tightening over the next twelve months; positive Mexican real yields, the balance of payments and energy exposure support the peso.

Takeaway: Investors should expect limited dollar upside, a range-bound yen exchange rate and continued peso support, while recognizing that central-bank divergence, official intervention and geopolitical developments remain key risks.