TACO or MACO?
On Friday markets received headlines of the supposed conclusion to the closure of the Strait of Hormuz. Despite the vast consequences of military action upon the region and beyond, it has repeatedly been the Strait that has been cast as the epicentre of economic (mis)fortune during this war. Therefore, the initial reaction to this headline appeared justified. Cable pushed higher to reach almost 1.36 with EURUSD crossing 1.1850. However, this risk-on move failed to be sustained for any more than a matter of minutes.
So, what happened? Was this an example of the market chickening out from putting risk back on the table or just questioning the reliability of the announcement? If we cast our minds back to the Friday prior, markets had put significant faith in the peace talks to follow that weekend. The Dollar finished lower on the session on Friday 10th with emerging markets and higher beta currencies picking up significant value. Those weekend talks yielded very little progress and as of the next market open, Friday’s moves had been all but erased, with many pairs gapping lower at the open.
It is highly likely therefore that traders, having been burned the week prior, were hesitant to fully price the headline given that in the two days ahead, market trading would not be possible. With the US seizing a vessel over the weekend in its own tit-for-tat response to Iran’s actions in the Strait, that seems to have been a prudent move. Vice President Vance heads to Pakistan today for further negotiations with the fate of the war and Strait still unknown.
Discussion and Analysis by Charles Porter
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