USD: Safe-haven sentiment is pulling the strings – Rabobank

The direction of oil prices this morning reflects the market’s cumulative view on what it deems to be the current level of risk regarding the Middle East crisis.  Brent oil spiked higher at the open only to fall back to below levels traded towards the end of last week. There is a strong consensus agreement that if Iran were to close the Strait of Hormuz in retaliation to the weekend strikes by the US on three of its nuclear facilities, then oil prices would spike to somewhere over USD100 /b, Rabobank's FX analyst Jane Foley notes.

EUR/USD to dip back to 1.12 on a 3-month view

"The contained risk-off reaction appears to reflect expectations of some disruption to the supply of energy, though the limited movement in prices also suggests the view that these will not be unmanageable. In line with other asset classes, there has also been a discernible safe haven reaction in the FX market." 

"Most notably, the USD has reverted to type by displaying a safe haven bid. This is in contrast to its behaviour through most of the year to date when it has failed to rally on fears of a US tariff led global slowdown.  In our view, the ability of the USD to find buyers today reflects two factors. The first relates to positioning and the possibility that some investors have the need to cover short USD positions after this year’s heavy selling pressure. Overlapping this is the fact that the USD still has unique safe haven properties which are distinct to views regarding US exceptionalism." 

"Since the market has been busy unloading USDs since the start of the year, it follows that the risk off environment could spark concerns of a USD shortage particularly since the USD remains a prime invoicing currency.  Given also Rabo’s view that the Fed may only be able to cut rates once more this cycle due to inflation risks, we see risk of EUR/USD dipping back to EUR/USD1.12 on a 3-month view, though we expect the USD to soften again by the end of the year."