FX Daily: Remarkable resilience of risk assets
At a Glance
The desk interprets the recent uptick in risk asset purchases and dollar selling as a response to perceived progress in US-Iran negotiations, indicating a shift in investor sentiment. Per the full note source, this development contrasts sharply with earlier fears of a potential oil market tipping point that could lead to a significant spike in crude prices. With no major economic events on the horizon, the focus remains on how these geopolitical dynamics will influence currency movements, particularly the USD's potential downside. The consensus among firms suggests a cautious outlook, with targets reflecting a range of expectations for the USD's trajectory.
Key Takeaways
- 01Investors are favoring risk assets amid positive US-Iran negotiation news.
- 02The dollar is experiencing downward pressure as market sentiment shifts.
- 03Concerns over oil market volatility are being overshadowed by geopolitical optimism.
Full Analysis
What the desk is arguing
The recent gains in risk assets, fueled by encouraging news on US-Iran negotiations, signal a possible shift away from a dollar-centric outlook. Investors are currently prioritizing riskier positions, which contrasts sharply with earlier apprehensions over oil market stability and potential price spikes.
Crude oil's dynamics, particularly the concerns about a tipping point, seem to be overshadowed by this newfound optimism, indicating a market that is willing to explore downside risks for the dollar. The evolving geopolitical landscape might lead to a recalibration of asset valuations, especially if the situation remains volatile.
Where it sits in our coverage
Our internal consensus suggests a target of 1.075 for the USD, indicating a moderate bearish outlook compared to the current trading levels. This perspective diverges from some projections, suggesting a willingness among investors to explore riskier assets rather than favoring traditional safe havens like the dollar.
- Barclays: Target of 1.10 for Mar-26.
- JPMorgan: Target of 1.10 for Mar-26.
- Credit Suisse: Target of 1.15 for Mar-26.
How other firms see it
Analysts at several firms express a mixed sentiment regarding the direction of the dollar in light of recent events. While some, such as firmId J.P. Morgan, mirror our outlook and see potential for the dollar to face downward pressure, others like firmId Bank of America maintain a more conservative stance, anticipating only minor fluctuations with a target of 1.04.
Market Implications
A continued preference for risk assets may lead to further dollar weakness, particularly if negotiations yield tangible outcomes. This scenario could also sustain upward pressure on crude oil prices, complicating the broader economic landscape.
From the original
Investors have jumped on the news of 'great progress' in US-Iran negotiations, buying risk assets and selling the dollar. This is a far cry from the view that the oil market was close to a 'tipping point' which could trigger a non-linear spike in crude. It is too early to sound t
Related speeches
4 itemsFX Daily: War is over – maybe
The desk posits that the potential US-Iran peace deal could impact the dollar negatively amidst a backdrop of softening oil prices. Following President Trump's declaration of a ceasefire, markets exhibited typical optimistic responses, with Brent crude down 4% and the dollar retreating by 0.8% as short-dated US yields fell 10bps. Per the full note from ING, while progress appears to be on the horizon, the lack of Iranian confirmation and the historically volatile nature of such announcements pose significant uncertainty amidst a market eager for stable oil supplies and reduced inflation pressures.
FX Daily: Fading geopolitical risk, focus on rate differentials
The desk emphasizes that geopolitical tensions in the Middle East have surprisingly failed to bolster the dollar, while focus shifts decisively back to interest rate differentials, as noted in the recent commentary [source]. Despite the backdrop of escalating US-Iran tensions, including US strikes on Iranian infrastructure and threats of a full blockade of the Strait of Hormuz, the dollar remains relatively stable owing to improving sentiment in risk assets and a decline in oil prices. Front-end rate implications are shifting, with the 2-year USD swap rate having lost ground this week, presenting a broader context where some investors are recalibrating their hawkish expectations for the Fed against improving outlooks overseas; currently 35 basis points of tightening is priced in for December 2023 while the euro has gained on the dollar amid expectations of ECB hawkishness.