Risks of an escalation in the Israel-Iran conflict are rising, with Trump saying the US will decide on whether to attack Iran over the next two weeks. A US attack could raise the risks of more aggressive Iranian actions, such as closing the Straits of Hormuz or widening attacks across the Middle East, potentially engulfing the region in conflict. While the flow of oil remains unimpeded (for now), the risk premium in oil prices is surging due to geopolitical risks, with Brent prices rising towards $80 and marking a 5-month high. The USD may see a knee-jerk rally on safe haven demand if the US attacks, but markets will be wary of large-scale US troop deployments, which could add to the US fiscal burden and dim the USD’s longer-term outlook.
Within Asian FX, our statistical analysis shows KRW to be highly vulnerable to rising oil prices, while SGD and CNH are more resilient. Korea is a significant net importer of crude and petroleum products, with a heavy reliance on the Middle East for supply. Since the outbreak of the Israel-Iran conflict last Friday, the KRW has depreciated by 1.1%, with USD/KRW rising towards 1380. In contrast, CNH and SGD have seen only small losses of 0.2% and 0.5% in the same period, with USD/CNH and USD/SGD consolidating around 7.18 and 1.28 levels respectively.
In Europe, BOE kept rates unchanged yesterday, with a 6-3 split in votes between a hold and a cut. GBP/USD initially dipped given more votes for a cut than the 2 votes expected, but it subsequently rallied towards 1.35 after Deputy Governor Lombardelli commented that inflation is still too high, with services inflation proving to be quite sticky. BOE’s policy stance thus appear to remain unchanged, with a calibrated easing depending on inflation outcomes. SNB cut rates to zero yesterday, with USD/CHF easing towards mid-0.81 levels post-decision as expectations of more aggressive rate cuts were unwound. The SNB also did not rule out the possibility of FX interventions to curb excessive CHF strength amid weaker inflation.
Quote of the Day
“My filmmaking really began with technology. It began through technology, not through telling stories, because my 8mm movie camera was the way into whatever I decided to do.”
Steven Spielberg
June 20 in history
In 1975, the film Jaws was released in the US, became the highest-grossing film of that time and started the trend of films known as "summer blockbusters".
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