USD: Market reprieve and Dollar risks – Rabobank

Rabobank strategists Michael Every and Bas van Geffen note that a temporary ceasefire between the United States (US) and Iran has sharply reduced immediate risk premia, with Brent lower and equities higher. However, they stress this is only a short truce, leaving at least two weeks of uncertainty. They highlight scenarios ranging from a clear US win to a damaging outcome for the Dollar and Gulf Cooperation Council (GCC) assets.

Ceasefire shifts but not ends risks

"Markets are trading this as a TACO [Trump Always Chickens Out] Tuesday. Brent futures are down 14% at the time of writing, Asian equity markets rallied, and futures pricing suggests the same will happen when European and American markets open. And bets of near-term rate hikes evaporated as the truce ends days before major central banks next reconvene to recalibrate their policy stance."

"Yet, this short-term truce is not a peace deal, and is anyone willing to sail through the Strait as long as the conflict isn’t fully resolved? So, today’s reprieve will be followed by at least two weeks of extended uncertainty – and possibly longer, if both sides agree to extend the negotiations."

"So, the fog of war is still in place even if the fighting might have stopped for now. Nobody knows what will happen next, but the possible spectrum is clear:- Best case: the war is over –though the related Israel-Hezbollah one in Lebanon is apparently not included, according to PM Netanyahu– and other related global tensions could even ease in tandem. (Because the US wins as Iran and others blink.) - Good case: the war is over. (Because Iran blinked.) - ‘Good’ case: the war is over. (Because Trump blinked. The knock-on effects aren’t something markets want to consider now, but they aren’t pretty for the dollar or GCC and western assets.)- OK case: the war is paused and Hormuz reopens briefly to give the world economy some breathing room. (Because Iran and US blinked.) - Worst case: the ceasefire collapses and the war both continues and escalates to try to get us back to one side backing down - watch US military logistics closely."

"In terms of our macro and market scenarios, the latest news leans towards our base case of fighting being over by mid-April with a slow Hormuz reopening – and on US terms. Obviously, if this pause instead leads to more fighting, we move towards our other, more damaging scenarios."

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