Cautious risk tone with peace doubts – MUFG

MUFG’s Senior Currency Analyst Michael Wan notes that Asian currencies recovered as risk sentiment improved following comments from US President Trump on ending the Iran war, even as Oil prices stayed elevated. He remains skeptical that a durable peace deal is near and advises caution in positioning, highlighting China’s diplomatic role and the broader geopolitical risks for Asia FX and the Dollar.

Risk rally meets geopolitical skepticism

“Markets rallied and turned risk on, as US President Trump said that he foresaw the US ending the war on Iran within 2-3 weeks, while the WSJ also reported that the US administration is willing to end the military campaign against Iran even if the Strait of Hormuz remains largely closed. Meanwhile, Iran’s President Pezeshkian stated that Iran is prepared to end the war if Iran receive guarantees.”

“The risk on sentiment and consequently Dollar weakness and recovery in Asian currencies were happening even as oil prices remained elevated with strikes and damages on Russia’s Ust-Luga Port potentially endangering 45% of Russia’s export capacity even if temporarily, and US-Israel strikes in Iran’s Qeshm Island in the Hormuz Strait. “

“We remain quite skeptical for now that a pathway to a durable peace deal can be reached for a few reasons, even as both sides have openly stated that they want to end the war. First, the comments from Iran’s President Pezeshkian is not entirely new, and the more important point is how to end the war and on whose terms – Iran, the US or others.”

“Second, the overall power structure in Iran suggests that it’s not President Pezeshkian who is in charge but rather a more hardline regime in the Iran Revolutionary Guards, and certainly the key message from the war is that the Strait of Hormuz is an important leverage for Iran and they will as such want to extract their pound of flesh from any agreement.”

“Third, even if the US were to unilaterally leave the Middle East as suggested by news reports, but to our minds this seems like an extremely unstable equilibrium with various actors including the Gulf States and Israel unlikely to take the status quo as it stands, while there is also the longer-term question around Iran’s nuclear weapon capabilities and capacities.”

“We as such would remain cautious in positioning and markets for now, but nonetheless we think that China’s potential involvement even if indirectly through diplomatic channels for now is important and a key for how things could evolve.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)