Ceasefire deal and divergent policies
At a Glance
The MUFG EMEA report highlights the market's optimism regarding a ceasefire deal impacting the Strait of Hormuz, stating this development is largely priced into current Brent crude prices, which have fallen nearly 20% since mid-May. The desk interprets this as a critical juncture that could influence USD and commodity-linked currencies such as AUD and NZD. In addition to oil's price trajectory, the report notes an unprecedented drop in AUD/NZD, reflecting international sentiment on Australian economic resilience versus global risks. Per the full note, this backdrop sets the stage for significant volatility amongst Australian and New Zealand dollar pairs in the near term.
Key Takeaways
- 01Ceasefire deal impacts oil prices and currency valuations.
- 02AUD/NZD sees significant drop, reflecting risk sentiment shifts.
- 03Market dynamics influenced by broader geopolitical factors.
Full Analysis
What the desk is arguing
The desk asserts that the pricing of the ceasefire deal and its effects on oil prices will create headwinds for the Australian Dollar. MUFG notes that optimism surrounding Brent crude's future trajectory has contributed to its decline by almost 20%, which could adversely impact currencies tied to commodity exports like the AUD.
Data from the report emphasizes that the AUD/NZD pair has seen its largest fall since 2016, reflecting shifting market dynamics influenced by geopolitical factors. This depreciation underscores the market’s reevaluation of risk sentiment, further solidifying the desk's outlook on these currencies.
Where it sits in our coverage
The consensus target for AUD/NZD stands at 1.075, with a range between 1.04 and 1.12. Key firms include: - jpmorgan: target of 1.10, tenor Mar26 - bofa: target of 1.04, tenor Mar26
This perspective aligns with jpmorgan's stance while it diverges from bofa's more cautious outlook on the pair's future performance, suggesting a bullish sentiment compared to their lower target.
How other firms see it
Firms such as jpmorgan and citi are aligned in viewing AUD as potentially undervalued given the oil price dynamics, while bofa maintains a bearish outlook on AUD. The market sentiment seems concentrated around commodity price movements, affecting currencies across the board, particularly in pairs like AUD/JPY and NZD/USD, which closely correlate with external economic conditions and monetary policies.
What the calendar says
No major calendar events are anticipated that could directly impact the AUD/NZD in the coming weeks, leaving traders to focus on evolving geopolitical landscapes and commodity price shifts.
Market Implications
Traders should watch the AUD/NZD closely, particularly if it approaches the resistance level around 1.075. Observing Brent crude to gauge any further price movements will also be paramount, as this dictates commodity-linked currency performance.
From the original
Reaching a deal to extend the ceasefire for 60 days and reopen the Strait of Hormuz is now largely priced. Brent crude oil is down close to 20% from the high on 18th May reflecting the optimism that a deal would be done. Derek Halpenny, Head of Research Global Markets EMEA & Inte
Related speeches
4 itemsGlobal Commodities: Seeing the Invisible
The desk posits that persistent commodity tightness, particularly in natural gas and aluminum markets, underscores broader supply chain vulnerabilities resulting from geopolitical tensions, notably the closure of the Strait of Hormuz. Per the full note from J.P. Morgan, despite the implementation of a Memorandum of Understanding aimed at easing pressures, traders should remain wary of ongoing constraints that could disrupt pricing dynamics. This insight highlights the interconnectedness between energy commodities and foreign exchange movements, as any sustained price spike in these sectors could affect currency pairs like AUD/USD and CAD/USD, leveraging commodities' influential role on the broader economy.
Australian Dollar declines from two-month highs as Hormuz tensions lift the US Dollar - tmgm.com
More from MUFG EMEA
5 items- MUFG EMEA
USD downside risks as Washington hits USD sentiment again
- MUFG EMEA
What has been driving USD/JPY after last month’s intervention driven gains?
- MUFG EMEA
US joining JPY intervention matters but policy & fundamentals matter more
- MUFG EMEA
What’s next for USD/JPY after this week’s sharp correction lower?