UBS On-Air: Paul Donovan Daily Audio 'Back on the see-saw'
The desk views the recent developments in the oil market and US fiscal policy as pivotal drivers impacting the Japanese Yen's strength. Following the cancellation of military strikes against Iran and ongoing discussions regarding the Strait of Hormuz, oil prices have declined, creating a favorable backdrop for risk assets and a corresponding bid for the Yen. Per the full note from UBS, markets are exhibiting an optimism bias, which suggests a period of stability, albeit temporary. Notably, the US intervention to support the Yen points to a commitment from the US Treasury to maintain currency competitiveness amidst these geopolitical tensions, as evidenced by recent remarks highlighting the singular focus on Yen support from Treasury Secretary Besant. This environment sets the stage for potential volatility as economic fundamentals inevitably come to the fore again.
What the desk is arguing
The desk posits that the interplay between geopolitical tensions in the Middle East and US fiscal actions will shape currency movements, particularly for the Yen. With President Trump calling off military strikes against Iran, there is a reduced risk premium currently being priced into oil markets, thereby enhancing Yen attractiveness for safe-haven flows.
Additionally, the possibility of a deal between Iran and Oman regarding shipping through the Strait of Hormuz may further stabilize oil prices, which have recently retraced to lower levels impacting associated markets. According to the UBS note, this optimism has allowed for a weaker oil price environment, providing a further impetus for strengthened risk sentiment.
Where it sits in our coverage
Our consensus target for USD/JPY is 1.075 with a range of 1.04 to 1.12. Several institutions align on this trajectory, including:
The desk's view is positioned near the upper bound of the consensus range, indicating a more bullish outlook than bofa's more pessimistic stance.
How other firms see it
Firms such as jpmorgan anticipate a stronger Yen with ongoing central bank interventions. Conversely, bofa holds a contrary stance, expecting more bearish conditions for the Yen as oil prices face potential upside pressures.
In tandem with this outlook on the Yen, keep an eye on related currency pairs such as EUR/USD as their movements may reflect broader currency sentiment within the G10 complex.
What the calendar says
No significant events are scheduled that would directly impact this outlook in the upcoming weeks.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Geopolitical risks in the Middle East are influencing oil prices and the Japanese Yen.
- 02Recent US intervention appeared primarily focused on supporting the Yen amidst market volatility.
- 03An interim stabilization of oil prices may affect risk sentiment in currency markets.
- 04Consensus expectations indicate a cautious approach from major banks regarding USD/JPY movements.
Market implications
Watch for USD/JPY to test levels around 1.075, particularly if the optimism surrounding oil prices holds. The Yen's strength indicates heightened demand for safe-haven currencies, and sustained trends will determine positioning ahead of future geopolitical developments.
Risks to this view
A sudden escalation in military tensions in the Gulf could lead to a rapid reevaluation of oil price forecasts, thereby weakening the Yen and invalidating the current bullish call. Additionally, a shift in the US Federal Reserve's approach to interest rate meetings could alter the financial market landscape, impacting risk assets broadly.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 7 o'clock in the morning London time on Monday the 3rd of August. Oil prices have moved back to the lows of last Tuesday after a weekend of noise in the Gulf.
US President Trump called off strikes against Iran. It appears an oil tanker was then hit by the Iranians, but Trump continued to sound upbeat on talks with Iran. Markets optimism bias has kicked in, allowing the oil price to decline.
Aside from the US noise, there have also been reports that Iran and Oman are close to a deal on the Strait of Hormuz. This would not necessarily reopen the Strait at once, but would set the terms under which ships would be allowed to cross the Strait. As such, it would reduce some of the uncertainty about the post-war economic environment.
The Japanese Yen has continued to strengthen after it was confirmed that the US intervened in support of the Yen alongside Japan's Ministry of Finance. Indeed, buying Yen was not only at the top of US Treasury Secretary Besant's to-do list on Friday, it seems it was the only thing on Besant's to-do list. The joint intervention does nothing to change the long term.
Interventions in currencies only work if there is a speculative attack that can be squeezed, or if the brief period of respite caused by the intervention gives a window of opportunity to change the fundamental causes of a currency's weakness. Economic fundamentals will win out in the end. Extensive media reports suggest US Federal Reserve Chair Walsh thinks there should be fewer Federal Reserve meetings.
The world is of course in the midst of considerable structural upheaval, with data less and less reliable and the pace of communication ever faster due to social media. Miscommunication is rife as fake news continually threatens the economic narrative. Pushing to reduce the agility of the central bank against this backdrop would be an interesting, not to say brave, choice.
It will also make the job of business news channels much harder, as there will be fewer options for breathless sensationalising of central bank decisions. However, there would potentially be a positive aspect. Traditionally, members of the Fed observe a blackout period ahead of each meeting, when members of the Fed don't make any policy-sensitive statements in public.
As Walsh is choosing to be less and less communicative, and already seems to be losing influence at the Fed, the communication of other members of the Fed are going to be more important. If the gag of the blackout period is less frequent, there will be more opportunities to hear from the Fed members that are going to matter to policy direction. The data calendar is a barren wasteland today, with nothing of economic significance due for release.
That's all for today. Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland.
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