Weren’t markets waiting for a deal?
Yesterday was the first trading session after President Trump announced a peace deal with Iran. Since the start of this war, headlines from of the conflict have dominated headlines and financial analysis. The announcement of a deal allowed risk assets, primarily US equities, to rally strongly. This is non-negligible given that this particular area of the market has been a key area driving growth and sentiment year-to-date. However, despite a modest and short-lived sell-off in the US Dollar and mild strengthening of high beta currencies including GBP and SEK, there was little evidence of a eureka moment within FX.
So, why was this? There are several reasons. Firstly, we should be reminded that this deal negotiated by President Trump is only a 2-month ceasefire at heart. It paves the way but doesn’t commit to a permanent resolution of that conflict. Still, there’s more than just this limitation behind the market’s apparent apathy. The main reason for a lack of euphoria is that market has been trading for some time as if there has already been a deal. If you look at oil and many FX pairs, any initial premium implied by the conflict was already largely, if not entirely, erased. A deal may have been more necessary to sustain current pricing than it was to provide relief to current pricing.
Lastly, Israel may remain a risk. It’s clear that Israel is not happy with the deal largely arranged by Trump. Israel is in an election year, limiting the viability of peace is the face of what it sees as an unfair deal. If the resolution of the war in Iran is to have a material impact particularly on G10 FX, then the next step from here will be to see real evidence of the Strait of Hormuz reopening to commercial shipping and the material impacts upon growth that this can afford. This week’s trading will be characterised by a smattering of central bank monetary policy decisions and less about the deal Trump has struck. That said, watch out for any market-moving comments from the G7 meeting ongoing in Évian for the earlier half of this week.
Discussion and Analysis by Charles Porter
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