Yen extends gains below 157.80 as BOJ hawks and less hawkish Fed voices collideWSJ reports Trump privately weighs declaring Iran war over (50,000 troops to keep options open)China’s RatingDog services PMI beats strongly as domestic demand offsets soft export growthOil popping higher as Kuwait reports missile and drone attacksPBOC sets USD/ CNY reference rate for today at 6.7807 (vs. estimate at 6.7167)Bitcoin and Ethereum slide as US Iran war simmers & rate hike odds riseYen support: Japan services PMI hits five-month high as inflation strengthens BOJ hike caseCNN report US military escorts 40 tankers with 18 million barrels through HormuzFed’s Williams calms market nerves, says Treasury yield surge reflects strong economy, not distressAUD/NZD tests key resistance after RBNZ ‘sell the fact’ hike and Australia GDP beatBrent and WTI hit highest levels (resistance now?) since late July as Middle East war flaresICYMI: Dutch central bank cuts US and Canada gold exposure to London, cites geopolitical unrestNZD/USD fell post RBNZ, 0.5890 and 0.5840 now the levels to watchinvestingLive Americas FX news wrap 2 Sept: USD mixed, stocks rise as Iran tensions simmer
Summary:
The Wall Street Journal reported that President Trump is privately discussing declaring the Iran war over with senior aides and has said he favours the idea, betting that sustained economic pressure will eventually force Iran’s regime to dismantle its nuclear program or collapse.Defense Secretary Pete Hegseth is separately extending US troop deployments across the Middle East into 2027, a sign the Pentagon is planning for the conflict to persist even as Trump weighs an exit.The US military escorted 40 commercial vessels carrying around 18 million barrels of oil through the Strait of Hormuz on Tuesday, a wartime high approaching pre-war flow levels, intercepting a cruise missile and repelling drone attacks, CNN reported.Iran struck a US military base in Kuwait with missiles and drones, with thick smoke reported at the site as Kuwaiti air defenses responded.Gold extended its rebound to above $4,420 an ounce, supported by dollar weakness and yields pulling back from recent highs.RBNZ Governor Breman defended Wednesday’s hike to 2.75% as appropriate, expecting growth to broaden, while flagging inflation expectation risks and indirect oil price effects; Chief Economist Conway noted stark regional divergence and tough conditions in Auckland.New York Fed President John Williams tempered expectations for a September rate hike; Fed Governor Waller is due to speak in the upcoming US session.Japan’s services PMI rose to a five-month high of 52.5 in August from 51.2, with S&P Global saying near-record output charge growth strengthens the case for another BOJ hike.China’s RatingDog Services PMI rose to 51.4 from 50.4, diverging from Monday’s softer official survey, with the Composite PMI up to 52.1 from 50.8.Asia-Pac stocks were mostly higher, tracking Wall Street’s gains, with yields edging lower; the Nikkei was up only modestly on yen strength while the Kospi outperformed, up around 1.5%.USD/JPY fell below 158, its lowest since August 10, with yen crosses broadly lower even as EUR/USD and GBP/USD rose.
The dominant story for markets Thursday, IMHO, is a Wall Street Journal report that President Trump is privately discussing declaring the war with Iran over, even as his own Pentagon quietly extends troop deployments across the Middle East into 2027. According to the report, Trump has told senior aides he favours declaring an end to the six month conflict, calculating that continued economic pressure will eventually force Tehran to dismantle its nuclear program or collapse outright. That stated preference sits in tension with Defense Secretary Pete Hegseth’s approach, which is extending deployment timelines for warships, air defense units and paratroopers, an open ended posture designed to preserve Trump’s options rather than wind the conflict down.
The de-escalation narrative gained some support from a separate CNN report, which said the US military escorted 40 commercial vessels carrying approximately 18 million barrels of oil through the Strait of Hormuz on Tuesday, a wartime high that approaches pre-war throughput levels. US forces intercepted an anti-ship cruise missile and repelled multiple drone attacks during the operation. If accurate, the scale of the escorted flow builds the case that supply concerns are being effectively managed, and is likely to weigh on the geopolitical risk premium in oil prices at the margin.
The picture remains far from settled on the ground, however. Iran struck a US military base in Kuwait with missiles and drones, with sources describing thick smoke billowing from the site as Kuwaiti air defenses responded to the attack. President Trump also said publicly that the renewed campaign against Iran would not continue for much longer, comments consistent with the private deliberations reported by the Journal.
Elsewhere, gold extended its rebound from the prior session, returning above $4,420 an ounce, supported by broad US dollar weakness and Treasury yields easing back from recent peaks.
On central banks, Reserve Bank of New Zealand Governor Anna Breman said gradual removal of monetary stimulus remains appropriate following Wednesday’s hike to 2.75%, and said she expects growth to broaden over the coming year. She flagged risks around inflation expectations and indirect effects from higher oil prices. Chief Economist Carl Conway separately noted stark regional differences within the New Zealand economy, describing conditions in Auckland as challenging. In the US Wednesday, New York Fed President John Williams tempered expectations for a rate hike at this month’s meeting, while Fed Governor Christopher Waller is due to speak in the upcoming US session.
On data, Japan’s services PMI rose to a five month high of 52.5 in August from 51.2, with S&P Global’s Annabel Fiddes saying the near record pace of output charge increases strengthens the case for another Bank of Japan rate hike. In China, the private RatingDog Services PMI rose to 51.4 from 50.4, extending a divergence from Monday’s softer official survey, with the RatingDog Composite PMI rising to 52.1 from 50.8.
Asia-Pacific equities were mostly higher on Thursday, taking their cue from overnight gains on Wall Street, with yields edging lower across the region. Japan’s Nikkei posted only modest gains as a strengthening yen weighed on exporters, while South Korea’s Kospi outperformed regional peers, rising around 1.5%.
In currencies, USD/JPY fell below 158, its lowest level since August 10, with broad yen strength pushing most yen crosses lower even as EUR/USD and GBP/USD both advanced. There has been growing market chatter around the Bank of Japan’s September 17 and 18 meeting, which is followed by market closures on September 21, 22 and 23, with some flagging a risk of intervention landing during those thinly traded holiday days. With the meeting still roughly two weeks away, that narrative looks somewhat overblown at this stage. A more credible driver of the current yen bid is straightforward hawkish repricing ahead of the meeting itself, following BOJ board member Hajime Takata’s comments this week calling for a nimble rather than fixed pace approach to further rate hikes.
This article was written by Eamonn Sheridan at investinglive.com.