Currency Traders Seek Geopolitical Safe Havens in Options Market

Forex

Economic

Summary:

Long-volatility exposure hedges after Israeli strike, while Swiss franc demand rises amid Middle East tensions, shifting currency markets to risk-off mode.

Amid escalating fears of a widening conflict in the Middle East, currency markets have shifted into full risk-off mode. Traders are flocking to safe havens, both in spot and options markets. The dollar saw gains against most Group-of-10 currencies, except for the Swiss franc and the Japanese yen, following reports of Israel's retaliatory strike on Iran. The Bloomberg Dollar Spot Index extended its rise for a seventh day in eight, reflecting the heightened risk aversion among investors.

Options activity further highlights the rush for safe havens. Risk reversals indicate increased bullishness on the Swiss franc versus the euro, reaching levels not seen since late 2022. Meanwhile, demand for options betting on yen strength against the dollar surged to its highest level since July. Israel's retaliatory action, reportedly occurring shortly after Tehran's recent rocket and drone attacks, has added to geopolitical tensions in the region. Despite initial efforts to downplay the incident by Iranian media, the situation has fueled market volatility, particularly impacting oil-linked currencies as crude prices briefly surged above $90 a barrel.

The spike in oil prices has led to increased volatility in currencies tied to oil-producing countries. The cost of hedging one-week moves on the Canadian dollar experienced its sharpest increase in 15 months, while Norwegian krone volatility is on track for its second-largest gain this year. Additionally, the greenback remains in demand, with one-month risk reversals for the Bloomberg Dollar Spot Index trading close to a one-year high.

These developments underscore the intricate relationship between geopolitical events and currency market dynamics. As tensions in the Middle East escalate, investors are turning to traditional safe-haven currencies such as the Swiss franc and the Japanese yen to protect against potential market disruptions. Moreover, the surge in oil prices has implications for oil-exporting countries' currencies, with increased volatility reflecting uncertainty surrounding global energy markets.

From a technical standpoint, heightened geopolitical tensions can lead to increased market volatility and fluctuations in currency exchange rates. Traders may adjust their positions in response to changing risk perceptions, leading to abrupt movements in currency pairs. Additionally, geopolitical risks can impact investor sentiment, influencing capital flows and investment decisions in currency markets.

Looking ahead, market participants will closely monitor developments in the Middle East for potential further escalation or de-escalation of tensions. Any significant developments could have profound implications for currency markets, potentially leading to prolonged periods of volatility and shifts in market sentiment. As always, investors should remain vigilant and adaptable to navigate the ever-changing landscape of global geopolitical events and their impact on financial markets.

The recent escalation of tensions in the Middle East has prompted a flight to safety in currency markets, with traders seeking refuge in traditional safe-haven currencies and options markets. The surge in oil prices has added to market uncertainty, particularly impacting currencies tied to oil-producing countries. As geopolitical risks persist, market participants must remain vigilant and responsive to evolving developments to navigate the dynamic landscape of currency trading effectively.

Source: Bloomberg

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Kevin Du

Economic

Energy

Power generated by solar panels is the cheapest source of electricity in several regions, and tends to drive down the price of wholesale power during peak solar output periods, eroding margins for power producers.

The phenomenon, known as the renewables cannibalization effect, is particularly acute in Europe's electricity system which prioritizes clean electricity supplies and where politicians have set ambitious decarbonization goals designed to reduce reliance on imported fossil fuels.

Renewables-driven price disruptions have gained widespread attention in the United States due to the creation of a so-called 'Duck Curve' in Californian power prices, where massive volumes of solar output during the middle of the day flood the market just as overall power demand is at a lull.

To accommodate that surplus power load, power prices tend to plunge in a way that is similar to the shape of a duck's belly, before rising again later as solar output declines.

Europe's integrated power markets must brace for similar periods of price disruption, following rapid expansions in solar capacity across the continent.

These disruptions have the potential to temporarily undermine the economics of power production from all sources, and may therefore deter investments in further regional generation capacity at a critical time.

For policymakers who support a rapid transition of energy systems away from fossil fuels while ensuring continued power sector stability, bouts of potentially loss-making power prices due to surplus solar output may be unnerving.

But authorities can take heart from the fact that energy consumers are already seeing the benefits of greater renewables output in the form of lower prices.

And in the longer term, consumers will also be better protected from future fuel price shocks once the build out of home-grown renewable power capacity is complete.

But over the nearer term, policymakers, energy consumers and power producers alike must prepare for further swings in power costs as the generation mix in Europe continues to evolve from primarily fossil fuel-based to being overwhelmingly run on clean fuels.

FAST TRACK

After Asia, Europe has been the fastest growing market for new solar capacity for the past decade, adding 172 gigawatts (GW) of capacity between 2012 and 2022, according to energy think tank Ember.

That compares to nearly 600 GW of capacity additions across Asia, and around 110 GW of capacity growth in North America over the same period.

Capacity data for 2023 has yet to be confirmed, but renewable industry analysts and consultants estimate that Europe will have set a new installation record again last year.

That rapid growth pace has allowed for solar power to grab a growing share of Europe's total electricity generation mix, which has doubled from around 5% during the summer of 2019 to just under 11% last summer, and the highest of all regions.

In contrast, solar's share of electricity generation in Asia topped out below 7% last summer, while in North America peaked at around 6.37%, Ember data shows.

CAPTURING THE PRICING IMPACT

The impact of such a rapid climb in solar output has already distorted Europe's power markets, and has resulted in utilities earning shrinking revenues from renewables.

As additional solar capacity has been brought online in several countries, regional power prices responded by trending broadly lower, especially during high solar output periods.

Price forecasting models have also had to be updated to account for the growing share of renewable power in generation systems, with so-called capture prices and capture rates being used to measure the impact of renewable cannibalization.

The capture price is a weighted average price during which the power generation asset produces electricity, and is expressed relative to the baseload contract price paid to fossil fuel-based power producers.

The capture rate is a measure of the capture price divided by market price available for the power produced, expressed as a percentage.

In the case of a natural gas plant that only produces power during peak demand periods, the typical capture rate can be 100%, as the plant can despatch maximum volumes to fulfil demand needs at peak prices, and then reduce or stop output when demand and prices decline.

For renewables assets, the capture rate is typically less than 100%, and can be far lower for solar assets that only produce electricity when the sun shines and often hit peak output just when demand and prices may be near their lowest during a typical day.

GERMANY AND SPAIN FEEL THE PAIN

Power price models in Germany and Spain clearly show the impact of declining capture prices and rates due to expanding solar output.

Due in part to rapidly rising electricity from solar farms, the wholesale power price from solar assets in Germany declined to the lowest in nearly four years this month, according to pricing models compiled by LSEG.

In turn, the lower solar-driven prices have dragged the overall German wholesale price lower.

The capture rate for German solar assets has also declined this month, plunging to as low as 50% of the baseload power contracts, LSEG data shows.

The capture rate is even lower in Spain, where abundant sunshine results in a surge in solar output that can often far exceed system demand needs during the day.

Spain's solar capture rates are expected to average around 85% for the rest of 2024, but decline steadily over the coming years to around 60% by 2030 and 45% by 2035.

Power developers concerned about the profit impact of such capture rate erosion could slow their development pace, and thereby potentially threaten national or regional energy transition momentum.

But if policymakers keep a long-term view in mind of the benefits from a fully developed renewable energy system, appropriate incentives for power developers could be created to ensure the pace of the region's energy transition is maintained.

Source: Reuters

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Ukadike Micheal

Economic

Cryptocurrency

Bitcoin enthusiasts around the world eagerly awaited Friday's 'halving,' a pivotal event in the cryptocurrency's ecosystem. The halving, which occurs approximately every four years, represents a significant milestone predetermined by Bitcoin's underlying protocol. Satoshi Nakamoto, the enigmatic figure behind Bitcoin's inception, embedded the halving mechanism into the code as a fundamental aspect of the cryptocurrency's monetary policy.

At its core, the halving serves to reduce the rate at which new bitcoins are created. This scarcity feature is a deliberate design choice intended to mimic the scarcity of precious metals like gold. With each halving, the reward for bitcoin miners is halved, making it increasingly challenging to mint new coins. This diminishing supply growth is fundamental to Bitcoin's value proposition, as it contrasts sharply with the inflationary policies of traditional fiat currencies.

Bitcoin's finite supply of 21 million tokens distinguishes it as a deflationary asset, a characteristic that resonates strongly with its proponents. The halving underscores this scarcity, as the production rate of new bitcoins decreases over time. Consequently, some enthusiasts view the halving as a critical event that highlights Bitcoin's status as digital gold, reinforcing its appeal as a hedge against inflation and economic uncertainty.

However, not all market participants share this optimistic view. Critics argue that the halving's impact on bitcoin's price is overstated and often driven by speculative fervor. While historical data suggests that previous halvings were followed by price rallies, correlation does not imply causation. Market dynamics are complex, and numerous factors contribute to bitcoin's price fluctuations, including investor sentiment, macroeconomic trends, regulatory developments, and technological advancements.

The lead-up to the halving typically sparks intense speculation and debate within the cryptocurrency community. Analysts offer a range of predictions, with some forecasting significant price appreciation, while others anticipate a more muted response. This diversity of opinions reflects the inherent uncertainty surrounding the cryptocurrency market and the challenges of predicting price movements accurately.

In recent years, bitcoin's price dynamics have been influenced by a confluence of factors beyond the halving itself. Regulatory developments, such as the approval of bitcoin exchange-traded funds (ETFs) and government policies on cryptocurrency taxation and oversight, play a significant role in shaping market sentiment. Additionally, macroeconomic trends, such as central bank monetary policy and geopolitical tensions, can impact investor confidence and risk appetite.

The recent surge in bitcoin's price to an all-time high in March reflects a combination of factors, including institutional adoption, mainstream acceptance, and macroeconomic uncertainty. However, the subsequent pullback underscores the inherent volatility and unpredictability of the cryptocurrency market.

Looking ahead, investors must consider a holistic view of the cryptocurrency landscape, taking into account both short-term price fluctuations and long-term fundamentals. While the halving event garners headlines and attention, its lasting impact on bitcoin's price trajectory remains uncertain. Ultimately, the evolution of the cryptocurrency market will be shaped by a complex interplay of technological innovation, regulatory developments, investor behavior, and macroeconomic trends.

The bitcoin halving represents a significant milestone in the cryptocurrency's journey, underscoring its unique value proposition and scarcity. However, investors must approach the market with caution, recognizing the inherent risks and uncertainties inherent in cryptocurrency investing. As the cryptocurrency ecosystem continues to evolve, informed decision-making and a long-term perspective will be crucial for navigating the dynamic and rapidly changing landscape.

Source: Reuters

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Kevin Du

Cryptocurrency

Bitcoin enthusiasts were eagerly waiting for bitcoin's 'halving' on Friday - a change to the cryptocurrency's underlying technology designed to cut the rate at which new bitcoins are created.

The halving, which happens roughly every four years, was written into Bitcoin's code at its inception by pseudonymous creator Satoshi Nakamoto as a way to reduce the rate at which bitcoins are created.

Chris Gannatti, Global Head of Research at asset manager WisdomTree, which markets bitcoin exchange-traded funds, called the halving "one of the biggest events in crypto this year".

According to CoinGecko's countdown clock, the halving is scheduled to happen in the early hours of Saturday GMT.

For some crypto fans, the halving will underscore bitcoin's value as an increasingly scarce commodity - Nakamoto capped bitcoin supply at 21 million tokens - while sceptics see it as little more than a technical change talked up by speculators to inflate the virtual currency's price.

The halving works by halving the rewards cryptocurrency miners receive for creating new tokens, making it more expensive for them to put new bitcoins into circulation.

It follows a surge in bitcoin's price to an all-time high of $73,803.25 in March, having spent much of 2023 slowly recovering from 2022's dramatic plunge. On Thursday the world's biggest cryptocurrency was trading at $63,800.

Bitcoin and other cryptocurrencies have been supported by excitement around the U.S. Securities and Exchange Commission's decision to approve spot bitcoin exchange-traded funds in January, as well as expectations that central banks will cut interest rates.

Previous halvings occurred in 2012, 2016 and 2020. Some crypto fans point to price rallies that followed them as a sign that bitcoin's next halving will boost its price, but many analysts are sceptical.

"We do not expect bitcoin price increases post halving as it has been already priced in," JP Morgan analysts wrote this week.

They expect bitcoin's price to fall after the halving, because it is "overbought" and venture capital funding for the crypto industry has been "subdued" this year.

Financial regulators have long warned that bitcoin is a high-risk asset, with limited real-world uses, although more have begun to approve bitcoin-linked trading products.

Andrew O'Neill, a crypto analyst at S&P Global, said he was "somewhat sceptical of the lessons that can be taken in terms of price prediction from previous halvings."

"It's only one factor in a multitude of factors that can drive price," he said.

Bitcoin has struggled for direction since March's record high and fallen in the last two weeks as geopolitical tensions and expectations central banks will keep rates higher for longer unnerved global markets.

Source: Reuters

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Samantha Luan

Economic

The volume of goods sold in stores and online was unchanged in March after a revised 0.1% gain the month before, the Office for National Statistics said on Friday. Economists had expected an 0.3% increase.

The figures add to evidence of a lackluster recovery from last year's recession. Consumers are still suffering from a cost-of-living crisis that forced them to pay more for the same amount of goods. While wages are rising rapidly and the Bank of England is expected to reduce interest rates, those forces have yet to fully feed through to people's finances.

“Hardware stores, furniture shops, petrol stations and clothing stores all reported a rise in sales,” said Heather Bovill, senior statistician at the ONS. “However, these gains were offset by falling food sales and in department stores where retailers say higher prices hit trading.”

The pound was little changed after the data, holding on an earlier drop of 0.3% to $1.2405. Traders added to bets on interest rate cuts later this year and have fully priced in the first quarter-point reduction from the BOE in September.

Retail sales grew 1.9% in the first quarter, meaning the sector contributed 0.09 percentage point GDP during the period, the ONS said. The economy as a whole is expected to have expanded 0.2%, according to the median of forecasts in a Bloomberg survey.

Fuel sales provided a lift for the weak figures. Excluding auto fuel, overall sales fell 0.3% in March, erasing a gain of the same size the month before.

“Today's retail sales data was somewhat of a damp squib, cracking retailers hopes of an Easter bounce-back in footfall,” said Phil Monkhouse, UK country manager at the financial services firm Ebury. “With retailers now getting to grips with two months of stagnation in a row, it seems the glimmer of hope after January's unexpectedly impressive rebound is now starting to dim.”

The figures were impacted by heavy rainfall in the first half of March, which carried on from the wettest February on record. Retailers say they're seeing more normal spending patterns than during the years interrupted by Covid-19.

“Large ticket items like furniture continued to sell badly as consumer spend remains restrained by the high cost of living,” said Kris Hamer, director of insight at the British Retail Consortium. “Footwear sales were impacted by the poor weather.”

Prime Minister Rishi Sunak is relying on a “feel good factor” from higher living standards, with his Conservative Party trailing in opinion polls ahead of a general election expected later this year.

Retailers including the UK's largest grocer Tesco Plc have resorted to price cuts to attract shoppers — reducing inflation in UK stores to its lowest level in more than two years.

“Consumer confidence remains fragile, and households continue to keep a close eye on where their tight budgets are being spent,” Linda Ellett, head of consumer markets, leisure & retail at KPMG UK, said in a statement released by the British Retail Consortium last week.

Source: Bloomberg

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Ukadike Micheal

Stocks

Economic

Amid escalating tensions in the Middle East, Asian stock markets experienced significant sell-offs on Friday. Reports of Israel launching a retaliatory attack against Iran triggered a wave of investor unease, with Japan's Topix leading losses by shedding 1.9 percent. The index had initially dropped by as much as 3 percent earlier in the trading day. The South Korean won emerged as the region's weakest currency, sliding by as much as 1.4 percent against the dollar to Won 1,392.91.

Gold, a traditional safe-haven asset during times of geopolitical uncertainty, surged by as much as 1.6 percent to $2,417.89 per troy ounce. Similarly, futures for Brent crude, the international oil benchmark, spiked by up to 4.2 percent to $90.75 per barrel, reflecting concerns about potential disruptions to the global oil supply.

In terms of market performance, the Hang Seng index experienced a decline of 1.4 percent, bringing its year-to-date (YTD) performance to a loss of 5.2 percent. The CSI 300, representing China's major stocks, also saw a dip of 0.8 percent, although it maintained a positive YTD return of 3.2 percent. The Topix index's drop of 1.9 percent further extended its negative YTD performance to 11.0 percent. The Kospi index in South Korea mirrored the general trend, decreasing by 1.6 percent, while its YTD performance remained slightly negative at -2.4 percent. The Nifty 50 index in India also experienced a minor decline of 0.6 percent, with a marginal positive YTD return of 0.6 percent.

From a technical standpoint, the heightened tensions in the Middle East can have significant implications for global markets. Geopolitical events often introduce uncertainty, which can lead to increased volatility in financial markets. Investors tend to react swiftly to such events, adjusting their portfolios to mitigate potential risks. In this case, the fear of a broader conflict in the Middle East could impact various sectors, including energy, defense, and transportation.

The spike in oil prices, as reflected by the surge in Brent crude futures, underscores concerns about potential disruptions to the oil supply chain. Any escalation of hostilities in the Middle East could threaten key oil-producing regions and disrupt the flow of crude oil to global markets. This could result in higher energy costs, affecting both consumers and businesses worldwide. Additionally, heightened geopolitical tensions may impact investor sentiment, leading to increased market volatility and a flight to safe-haven assets like gold.

In response to the geopolitical developments, market participants may adopt defensive strategies, such as reducing exposure to equities and increasing allocations to assets perceived as safer havens. Government bonds, particularly those issued by stable economies, could attract increased demand as investors seek refuge from market uncertainty. Similarly, currencies of countries perceived as less exposed to geopolitical risks may strengthen relative to those of nations directly involved in the conflict.

Furthermore, geopolitical tensions can have broader economic implications beyond financial markets. Uncertainty stemming from geopolitical events may weigh on business confidence and investment decisions, potentially dampening economic growth prospects. Businesses may delay capital expenditures or expansion plans until there is greater clarity regarding the geopolitical situation. Moreover, heightened tensions could disrupt global trade flows, leading to supply chain disruptions and higher costs for businesses reliant on international trade.

Despite the immediate market reactions to geopolitical events, it's essential to recognize that investor sentiment can be highly fluid. Market participants may reassess their positions as new information emerges or as geopolitical tensions evolve. Moreover, the impact of geopolitical events on financial markets can vary depending on a range of factors, including the duration and severity of the conflict, diplomatic efforts to de-escalate tensions, and broader macroeconomic conditions.

The recent sell-off in Asian stock markets, driven by escalating tensions in the Middle East, underscores the significant impact that geopolitical events can have on global financial markets. Heightened uncertainty has prompted investors to reassess risk exposures and seek refuge in traditional safe-haven assets. However, it's crucial to monitor developments closely and consider the broader implications for both financial markets and the global economy.

Source: Financial Times

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Cohen

Forex

Economic

“We work very closely with Governor Perry in order for us to be able to adjust the macro stance to adapt with this new level of pressure,” Finance Minister Sri Mulyani Indrawati said in a Bloomberg Television interview on Thursday, referring to Bank Indonesia's top policymaker.

Indonesia is focused on ensuring that fiscal policy can work as “an effective and credible shock absorber,” she said on the sidelines of the International Monetary Fund and World Bank Group meetings in Washington, DC.

Governor Perry Warjiyo said in a statement from DC that the BI — whose key mandate is to ensure currency stability — will also continue to support the rupiah “with foreign exchange interventions and other necessary measures.” Hours later, the central bank said it's intervening “more boldly” in FX markets.

The comments came as news of Israel's retaliatory strike against Iran roiled markets, pushing currencies including the rupiah to multi-year lows against the dollar on Friday. Indonesia's currency has been among the hardest hit in Asia this month, extending its decline to more than 2.5% in April to a four-year low.

The rupiah dropping beyond the key level of 16,000 versus the greenback — for the first time since 2020, prompted the BI to step up its interventions in the market to stem the fall. It's also adding pressure on the central bank to raise the benchmark rate further on April 24.

“The increasingly all-of-government response is revealing a level of concern that implies a higher risk of a larger, 50bps hike (to 6.5%),” Barclays Plc economist Brian Tan wrote in Friday note.

If the BI holds at 6%, it will likely sound hawkish and hint at the possibility of future hikes, Barclays said. Only six of 21 economists surveyed by Bloomberg so far expect the central bank to hike by 25 basis points on Wednesday, with the rest predicting a hold.

The governor, who surprised markets with a tightening in October amid the rupiah's rout, earlier this week said that the central bank is always in the market. In the statement dated Friday, he said the BI will manage foreign flows in a market-friendly manner, underscoring the importance of stabilizing exchange rate for the nation's resilience.

Southeast Asia's biggest economy on Thursday told its state-owned enterprises to refrain from making large dollar purchases for its import or debt servicing requirements to avoid adding pressure on the rupiah. Natural-resource exporters were also reminded to comply with rules to repatriate dollar earnings to shore up the nation's currency reserves.

Indrawati, during the interview in DC, said that while the strong dollar can increase the revenue from exports, it also risks adding inflationary pressures through imports.

Fiscal Outlook

Doubts over the incoming government's fiscal policy have also been keeping the rupiah under pressure, with foreign investors sidestepping Indonesia's debt market on concerns over Pesident-elect Prabowo Subianto's free-lunch program.

Without a clear financing strategy, the program could put Indonesia's debt load at risk and threaten its investment-grade sovereign rating, which was recently affirmed by Fitch Ratings and Moody's Ratings.

Indrawati, who will end her tenure as finance minister in October, said the budget deficit will remain under 3% and that Indonesia can sustain its 5% economic growth this year amid the higher-for-longer interest rate environment.

“Fiscal policy that is adjusting to many structural issues, but at the same time maintained in prudent principle is going to be very important,” Indrawati said.