Trump says Iran war "close to over" amid hopes for more negotiations
Investing.com -- UBS strategists warned that foreign exchange markets may face heightened volatility in the weeks ahead as the Iran conflict threatens to disrupt energy supplies for an extended period.
Brent crude has climbed back toward $115 per barrel, while Asian buyers are paying roughly $150 per barrel. UBS said the longer the conflict persists, the greater the risk that energy infrastructure will be targeted, potentially driving oil prices above the spikes seen in 2022.
In a note published Thursday, the Swiss bank said a doubling of energy costs could have a pronounced market impact if sustained. Should prices reach $200 per barrel, a global mobility crisis could emerge, UBS noted.
The firm expects currency volatility could rise by 4 percentage points in short order, reaching levels last seen during the COVID-19 pandemic in 2020 and the Ukraine war in 2022.
UBS is taking a selective approach to selling volatility in the near term, focusing on currency pairs trading at structurally attractive levels. The firm currently favors NZD/USD and EUR/NZD.
Major central banks including the Federal Reserve, European Central Bank, Swiss National Bank, and Bank of Japan held rates steady this week while emphasizing greater growth and inflation uncertainty.
UBS believes central banks are looking through the surge in oil prices for now, though that narrative would likely change if energy prices remain elevated.
The Bank of Japan’s decision to keep rates on hold was accompanied by a more hawkish tone, leaving the door open to further rate hikes. However, market confidence in the BoJ’s willingness to deliver higher rates remains low, UBS said.
The Swiss National Bank’s hold, combined with upside inflation risks, points to lower real rates in Switzerland. The SNB’s greater readiness to intervene against excessive franc appreciation suggests UBS does not favor chasing CHF strength at this stage.
The Federal Reserve left all options open while acknowledging risks from the Iran war. UBS believes there is still scope for at least a 25 basis point rate cut this year.
The combination of resilient macro data and the prospect of fewer rate cuts should provide broad support for the USD, with the DXY potentially trading around 102 in coming weeks, the firm said.
Greater geopolitical uncertainty and sustained higher oil prices prompted UBS to adjust some short-term forecasts. The firm now expects EURUSD to trade around 1.15 by the end of June, down from 1.20 previously. UBS lowered its June EUR/CHF forecast to 0.91 from 0.93.
For the GBP/USD, UBS believes there will be less scope for near-term rate cuts, particularly if economic indicators continue to show stabilization. In Asia, UBS raised its USD/JPY forecasts to 155 for June and 152 for September, as higher oil prices continue to weigh on yen sentiment.
The Reserve Bank of Australia raised the cash rate by 25 basis points to 4.1 percent Thursday, as most analysts predicted. However, the narrow 5-4 voting split reveals internal disagreement about when to tighten policy, UBS noted.
South Africa’s headline inflation eased to 3 percent in February from 3.5 percent in January. However, headline inflation is likely to reaccelerate in coming months due to the recent rise in energy prices, UBS said.