Back to square one?
Unlikely. If anything, the market today finds itself set back just one step and prices are reflecting a significant composure. Speaking at the NATO summit in Turkey yesterday the US President appeared to call off a truce between Iran and the US. He wasn’t highly complementary about the nation’s leadership either. So, if the deal’s off and strikes against Iran are underway once again, why has the market barely blinked?
During the height of the conflict earlier this year, oil soared above $120pbl. Yesterday, front month Brent was barely able to add two dollars per barrel to its futures price. What’s more is that Trump’s U-turn appears to be in retaliation to the attack on three merchant ships by Iran in the Persian Gulf on Tuesday. So, shipping and global commerce are once again not just relevant but are the root cause and sticking point within this conflict.
However, notable market participants have recommended to clients, or evidenced in their own positioning, a rotation away from Dollar-funded carry. This is particularly due to sticky and often rising US Dollar funding costs as well as uncertainty over spot gains in the Dollar. Instead, the Euro and the Australian Dollar have both emerged as viable replacement candidates. AUD may seem an odd choice given that it has seen the best performance against the Dollar amongst the G10 year-to-date. However, at an elevated spot price, vulnerability is building from a combination of declining commodity prices and a deteriorating trade balance. Therefore, spurred on by its relatively cheap funding costs, investors may begin sell AUD to fund such exposure to higher yielding emerging market currencies.
Discussion and Analysis by Charles Porter
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