UBS On-Air: Paul Donovan Daily Audio 'Firing amidst a ceasefire'
At a Glance
The desk views the recent escalation in US-Iran tensions as a critical factor influencing the global macro landscape, particularly with implications for oil prices and geopolitical risk. Per the full note from UBS, the Iranian government's resilience suggests a potential prolongation of the current geopolitical standoff, keeping the Strait of Hormuz closed longer than markets anticipate. This leads us to a cautious stance on currencies correlated with oil prices, particularly the USD and CAD, as rising geopolitical risks may drive volatility and risk aversion in the FX market.
Key Takeaways
- 01US-Iran tensions may prolong geopolitical instability, impacting oil prices and forex markets.
- 02The Iranian government's military capability suggests less urgency for negotiations with the US.
- 03Rising oil prices could increase demand for USD, particularly against CAD.
- 04Market volatility is expected as geopolitical risks influence trading sentiment.
Full Analysis
What the desk is arguing
The desk posits that the ongoing military confrontations between the US and Iran, highlighted in UBS's commentary, signal a potential for extended geopolitical instability. This risk could dampen economic recovery prospects, especially in energy-dependent economies, thereby influencing currency valuations.
The UBS report emphasizes that the Iranian government still possesses significant military resources, implying that it could sustain its current posture without immediate incentive to negotiate. This underlines the possibility for oil prices to rise, reflecting increased geopolitical risk premiums in the forex market.
Where it sits in our coverage
Our consensus target for the USD/CAD pair stands at 1.075, within a range of 1.04 to 1.12, with key firm targets including: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
This desk's cautious outlook aligns with jpmorgan's positioning, suggesting that rising oil prices, driven by geopolitical tensions, could exacerbate the weakness of CAD against USD, though it diverges from bofa's more bearish view on CAD.
How other firms see it
Firms aligned with our outlook, such as jpmorgan, emphasize the potential for increased volatility in the energy markets to affect currency pairs linked to oil. Conversely, bofa presents a more cautious stance, assessing lower exposure to the geopolitical risks at play.
The efficacy of this geopolitical assessment is mirrored in the dynamics of the USD/CAD and USD/BRL pairs, as both are significantly influenced by oil price movements and investor risk sentiment in emerging markets.
Market Implications
Traders should monitor the USD/CAD pair closely as oil prices react to Middle East developments. A break above 1.08 may signal increased demand for USD as tensions escalate further.
From the original
Iran launched attacks against US naval vessels, and the United Arab Emirates. The US launched airstrikes against Iran. The Washington Post reports the US CIA believes Iran’s government can avoid additional economic hardship for several months, and that Iran still holds substantia
Related speeches
4 itemsUBS On-Air: Paul Donovan Daily Audio 'Firing, not ceasing'
Paul Donovan argues that despite US claims of a ceasefire with Iran, continued military actions undermine that narrative, but markets are resilient due to optimism bias and Trump's low approval ratings limiting escalation risk. The market reaction remains muted as investors focus on US domestic politics and upcoming PCE data. Per the full note [source], a 34% approval rating historically pressures politicians to moderate foreign policy.
UBS On-Air: Paul Donovan Daily Audio 'Ceasing the ceasefire?'
The current geopolitical tension stemming from the U.S.-Iran exchange of fire has elicited a notably muted market response, indicating that investors are not overly concerned with immediate ramifications. Per the full note from UBS, this appears to reflect a prioritization of Iranian threats over the optimistic rhetoric from the U.S. administration. Despite fears regarding regional instability, oil prices remain stable well below levels that would significantly suppress global demand as they are not close to the estimated thresholds required for a 7% reduction. Current asset pricing suggests that while inflationary pressures are on the rise, maintained consumer spending is expected to absorb these costs without drastically affecting corporate margins.
UBS On-Air: Paul Donovan Daily Audio 'War and trade war costs'
The desk asserts that geopolitical tensions in the Gulf, particularly Iran's suspension of negotiations with the U.S., are injecting volatility into oil prices, which may influence broader market dynamics. Per the full note by Paul Donovan from UBS, the increase in oil prices is already imposing direct cost pressures on U.S. farmers, compelling the White House to reduce tariffs on agricultural equipment. Such adjustments, while immediate, do not provide relief for farmers facing war-related pricing challenges. The absence of significant upcoming economic events leaves traders to navigate these geopolitical undercurrents with limited guidance.
UBS On-Air: Paul Donovan Daily Audio 'Looking for consequences'
In light of recent US air strikes against Iran, the desk observes that markets are not reacting strongly, indicating a prevailing focus on the Iranian perspective rather than that of the US. Per the full note by UBS, the strikes seem to reinforce the belief that a negotiation resolution is not imminent, which contrasts with bullish sentiments implied in US President Trump's communications. This muted reaction may indicate that traders had already priced in a less optimistic outlook for the geopolitical situation. Additionally, the focus on UK inflation reads does not suggest immediate rate hikes from the Bank of England, given the lack of retail price pressure, which may further influence the FX landscape as traders weigh geopolitical risks against economic indicators.
More from UBS ON AIR
5 items- UBS ON AIR
Washington Weekly Podcast: US-Iran, US trade policy, FISA, & Secure America Act
- UBS ON AIR
UBS On-Air: Paul Donovan Daily Audio 'Carrying on, without keeping calm'
- UBS ON AIR
UBS On-Air: Paul Donovan Daily Audio 'How bad is the ECB error?'
- UBS ON AIR
Viewpoints with Burkhard Varnholt - A global markets podcast (Ep. 65)
- UBS ON AIR
UBS On-Air: Paul Donovan Daily Audio 'Inflation bonanza'