The geopolitical breakthrough between the US and Iran has triggered a relief rally across global currency markets, providing the strongest boost to oil-dependent emerging Asian economies. Markets responded to the 60-day ceasefire extension, which seeks to reopen the Strait of Hormuz, by aggressively buying back the currencies previously battered by intense energy-supply fears and skyrocketing crude prices. With Brent crude sliding to a three-month low of USD 83 per barrel, the PHP rebounded the most by 1.4%, closely followed by a 0.9% appreciation in the IDR and a 0.4% gain for the INR. US stock markets rebounded, with the Dow Jones Industrial Average hitting a fresh lifetime high, lifting the pro-cyclical AUD.
However, beyond these highly sensitive oil importers, the broader foreign exchange reaction remained muted and compressed, with most of Monday’s currency gains confined within a 0-0.4% band. The wider market appears to be withholding major positioning adjustments until the official 14-point memorandum is formally signed in Geneva on June 19.Markets remain wary of remaining diplomatic hurdles. For example, Israel has refused to join the bilateral peace framework, with Lebanon still experiencing Israeli military operations. Critical talks about Iran’s nuclear programs were also delayed amid a lingering dispute over frozen Iranian funds. Reopening the Strait of Hormuz also faces conflict over control of the waterway, transit tolls, and maritime safety among Iran, the US, and some Gulf and EU nations.
Additionally, the US Treasury 2Y yield bounced off the 4% level, with markets reluctant to abandon their bet for the Fed to hike later this year. Investors are anxiously watching Kevin Warsh's first FOMC meeting as Fed Chair on Wednesday, to see whether and how he diminishes forward guidance to balance the committee’s hawkish pause bias with US President Donald Trump’s explicit desire for lower rates.
The JPY and NZD were outliers, depreciating slightly overnight despite the strong market pricing for the Bank of Japan to hike today, and the Reserve Bank of New Zealand to raise rates on July 8. Markets view these actions as insurance-like hikes against sticky inflation, with plunging oil prices and fragile domestic growth already capping the prospects for further tightening. This defensive dynamic mirrors the EUR’s struggle to benefit from the European Central Bank’s rate hike last week, which was accompanied by downward growth revisions and upward inflation revisions.
Overall, what the US-Iran ceasefire framework has achieved so far is providing a relief rally, fuelled by hopes that the Middle East conflict will not be endless. However, global markets face a reality far from the business-as-usual environment that preceded Operation Epic Fury.
Quote of the Day
“Once you've been in space, you appreciate how small and fragile the Earth is.”
Valentina Tereshkova
June 16 in history
Valentina Tereshkova made history in 1963 as the first woman in space.
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