UBS On-Air: Paul Donovan Daily Audio 'Could go up, could go down'
Lead — The commentary from UBS highlights ongoing tensions between the US and Iran that are pushing oil prices upward, albeit only modestly compared to pre-conflict levels. Despite escalating hostilities, markets seem skeptical about the US's strategic position, which casts doubt on the durability of any short-term solutions. Per the full note source, the prevailing sentiment reflects an adaptation in global oil supply and demand behaviors as participants navigate geopolitical uncertainty. We expect this backdrop to create volatility in related currency pairs, particularly those sensitive to oil prices like the CAD and NOK.
What the desk is arguing
The desk frames this as a moment of cautious optimism amidst rising oil prices resulting from geopolitical tensions. Per the analysis by UBS, the Brent oil future has reached levels only about 10% above pre-war levels, which signals a collective hesitance from investors regarding the immediate ramifications of US-Iran hostilities.
The data shows that oil volumes in the Strait of Hormuz remain significantly constrained, yet the muted response in oil prices indicates that markets are adapting through alternative supply chains and changing demand patterns. This resilience reiterates the signaling from the Federal Reserve that interest rates could remain unchanged, with market participants projecting a potential cut only in mid-2027 based on internal Fed surveys.
Where it sits in our coverage
Current market consensus shows a target of 1.075 for the USD/CAD, with various forecasts indicating the following ranges: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns closely with jpmorgan, where our target sits at the upper range of the spread, indicating a bullish sentiment given the geopolitically influenced oil prices shaping market dynamics.
How other firms see it
Banks like jpmorgan and citi appear to align with the desk's optimistic outlook on oil, while bofa offers more cautious projections. The contrasting views underline the uncertainty surrounding geopolitical tensions and their potential implications for currency markets.
Traders should watch USD/CAD closely, particularly as oil dynamics may cause fluctuations, considering the link between crude prices and the Canadian Dollar's strength. Likewise, position adjustments in the NOK may also signal shifts based on oil price movements.
What the calendar says
No high-impact events are on the immediate calendar to influence this narrative, which means market participants will continue to react to geopolitical developments and Fed communications as they come without scheduled catalysts in the near term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US-Iran tensions increase oil prices, but with market skepticism regarding the US's strategic posture.
- 02Oil futures remain only 10% above pre-war levels, indicating subdued market reactions.
- 03The Federal Reserve shows internal divisions on rate changes, maintaining a cautious outlook for interest rates.
- 04Expectation of volatility in currency pairs like USD/CAD due to fluctuating oil prices.
Market implications
Currency traders should keep a close eye on USD/CAD, especially as movements in oil prices continue to play a significant role in shaping its trajectory. The next signal will likely stem from further developments in US-Iran relations and any Fed commentary that may hint at future monetary policy shifts.
Risks to this view
Should the geopolitical tensions escalate significantly, causing a more substantial spike in oil prices, or if upcoming economic data reveals unexpected strengths, this could force a reevaluation of current positions and expectations in the forex market.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's six o'clock in the morning London time on Thursday, the 9th of July.
An exchange of airstrikes between the United States and Iran has helped to push oil futures prices higher for a second day. However, the oil price perhaps reflects how much credibility markets ascribe to US President Trump's assertion that the ceasefire was quote, over. The key Brent oil future is roughly below the level it was before the Memorandum of Misunderstanding was agreed.
The fact that the oil futures price is only around 10% above pre-war levels is also noteworthy. This is despite the fact that even before the recent exchange of fire, the volume of oil flowing through the Strait of Hormuz was at a fraction of pre-war levels. The whole situation reflects two things.
First, markets do not seem to see the United States as being in a strong position. And with domestic retail oil prices still elevated, political pressures on the US administration would appear to remain significant. That keeps a bias to optimism about there being some kind of solution.
Second, people adapt in the face of a crisis. And whether this is by increased production outside of the Gulf, oil pipelines bypassing Hormuz operating at full capacity, or people changing their energy demand patterns, the net result is a more muted response in the oil price. The minutes of the June meeting of the US Federal Reserve showed that at the time of the meeting, market participants expected no change in rates this year, and a rate cut in the first half of 2027.
That's based on a survey of market participants conducted by the Fed. The debate at the Fed showed more divisions within that august and noble institution. The basic takeaway is that rates could go up or they could go down.
The problem is that in a world where economic data has become notably less precise, and survey evidence has little credibility, one can pull together a range of indicators in support of either policy stance. So far, there have been no second round effects from the oil shock, and tariff effects are naturally fading. The new tariffs should generally not result in higher consumer prices.
Profit margins were allowed to increase after the last round of tariffs were declared to be unlawful. And the rationale for that is that the temporary increase in margins will simply be reversed to accommodate the new tariffs when imposed. The costs associated with the shiny new toy of artificial intelligence are a slightly different inflation concern, but that shouldn't be enough to push the Fed into serious concerns about inflation overall.
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