To The Moon

USD

The US Dollar continues to operate at the center of the global financial narrative as the conflict in the Middle East enters its fourth week, driving a complex interplay between haven demand and energy-market volatility. (Bloomberg) While a gauge of the dollar strengthened recently, reaching its highest level since December, market sentiment remains fragmented with major institutions issuing conflicting outlooks. (Bloomberg, Morgan Stanley) Morgan Stanley strategists have warned that the current dollar rally may be a "bull trap," suggesting that investors have underpriced the growth-negative impact of the energy shock and that interest-rate differentials could soon move against the greenback as the Federal Reserve potentially looks past transitory inflation. (Bloomberg)

Conversely, the dollar remains a top defensive hedge as the effective closure of the Strait of Hormuz keeps energy prices elevated, reinforcing the US status as the world’s top energy producer. (Bloomberg) Invesco maintains a bearish structural view, arguing the currency is overvalued by approximately 5% since the imposition of global tariffs, yet acknowledges that its safe-haven status is currently being bolstered by the depth and liquidity of US financial markets. (Bloomberg) Speculative traders have reportedly erased a sizable short position against the greenback and are building long positions for the first time this year. (Bloomberg) The Trump administration is reportedly evaluating extreme economic scenarios, including the potential impact of oil prices spiking to $200 per barrel, although the Treasury has publicly conveyed continued confidence in long-term stability. (Bloomberg) On the policy front, US OIS markets are pricing in minimal tightening of roughly 4bp by year-end, as the market balances inflation fears against the risk of a global growth collapse. (Onyx)

G10 Currencies

The G10 space is currently characterized by extreme divergence as energy-importing nations face severe stagflationary pressures while commodity-linked currencies grapple with shifting risk appetite. (Onyx) In Australia, Nomura reports that February CPI printed slightly below consensus at 3.7% y-o-y, but warns that this is "as good as it gets" as fuel prices are estimated to rise 30% m-o-m in March. (Nomura) This is expected to jump headline CPI to at least 4.5% y-o-y, keeping the RBA firmly focused on inflation even as rationing risks emerge due to limited fuel supplies. (Nomura, Bloomberg)

The Japanese Yen continues to hang near YTD lows in the mid-159s against the dollar, with market participants on high alert for direct intervention by Tokyo. (FXStreet) However, Bank of Japan rate hike expectations are building, pushing two-year government bond yields to their highest level since 1996. (Bloomberg)

In the UK, CPI data matched expectations at 3%, but the Bank of England has upwardly revised its 2026 inflation projections to 3.5%, leading to a reassessment of the easing cycle. (Onyx, Bloomberg) The Euro remains vulnerable to the energy shock, with ECB President Christine Lagarde noting that hostilities have stoked significant inflationary risks. (Bloomberg) European gas storage levels are at multi-year lows—just 6% full in the Netherlands—forcing the region to compete aggressively with Asia for LNG supplies. (Bloomberg)

Meanwhile, the Canadian Dollar has weakened as the USD/CAD pair reached two-month highs near 1.3830, driven by broad US dollar strength and uncertainty over the duration of the Middle East conflict. (FXStreet)

Asia Currencies

Asian currency markets are facing a historic "balance-of-payments" strain as the energy crisis escalates, with BNY highlighting that currencies like the MYR, THB, AUD, and PHP are increasingly driven by energy by-product flows. (FXStreet)

In China, the PBOC set the USD/CNY central rate higher at 6.9056, signaling a cautious approach to exchange rate stability amid the global turmoil. (FXStreet) A significant long-term theme emerging from the conflict is the potential "beginning of the petroyuan," as Deutsche Bank notes reports that Iran is allowing transit through Hormuz for ships paying in Chinese yuan. (Bloomberg) Indian refiners are also reportedly settling Russian oil purchases in alternative currencies, including the UAE dirham and yuan, to reduce dollar reliance. (Onyx)

The Philippines has declared a state of national energy emergency, with President Ferdinand Marcos Jr. warning of possible plane groundings and fuel rationing as the country, which imports 98% of its oil from the Gulf, faces gas prices up over 100%. (Onyx, Bloomberg)

In Indonesia, the local credit market is under strain; yields for top-rated issuers have climbed 70bp this month as investors price in oil-driven inflation and capital outflows. (Bloomberg) DBS reports that Indonesian onshore markets are reopening cautiously after the Lebaran holiday to a backdrop of record-low rupiah levels and heightened scrutiny of the nation’s sovereign rating due to fiscal concerns over fuel subsidies. (FXStreet, Bloomberg)

JPM Valuation and Trade Analysis

Short EUR/CAD (Tactical/3M): This pair is currently the most statistically overvalued on a short-term basis with a 3M Z-score of 4.17 and mispricing of 1.5%. The spot price of 1.5986 is well above the model estimate of 1.5751. This suggests a potential mean-reversion trade, especially if Canadian energy exports find alternative routes or if Euro-zone growth concerns intensify.

Short USD/JPY (Medium Term/1Y): The USD/JPY pair remains significantly overvalued at 159.43 versus a 1-year model estimate of 151.04 (Z-score of 2.61). This aligns with the "bull trap" warning from Morgan Stanley and the intervention fears cited by FXStreet.

Short EUR/AUD (Long Term/2Y): This cross-rate shows consistent overvaluation across all timeframes, particularly the 2Y Z-score of 2.17. With the spot at 1.6647 and a 2Y model estimate of 1.5904, the pair looks overextended, potentially vulnerable to an eventual RBA-driven catch-up in the Australian Dollar.

Long EUR/SEK (Tactical/6M): Conversely, EUR/SEK appears significantly undervalued on a 6-month basis with a Z-score of -2.55. The spot of 10.81 is below the model estimate of 10.95, suggesting the SEK may have overshot its recent rally.