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Asia: RBI Policy Meeting, Taiwan CPI
Market Highlights
President Trump announced a two-week ceasefire with Iran while both sides negotiate a peace agreement, sending oil prices tumbling by 20%, the Dollar weaker, Asian currencies stronger, US Treasury yields lower and US equity market futures up by more than 2%. In particular, Trump said in his social media post that this ceasefire would be subject to Iran agreeing to the “complete, immediate, and safe opening of the Strait of Hormuz”. Meanwhile, the messages from other key parties including Iran were positive at face value. First, Iran has accepted the two-week ceasefire proposal, with its Foreign Minister saying that if attacks against Iran are halted, Iran will do likewise. Iran also said that for a period of two weeks, safe passage through the Strait of Hormuz will be possible via coordination with Iran’s Armed Forces, but also with “due consideration of technical limitations”. Second, news reports suggest that Israel is also part of the two-week ceasefire Trump agreed to, and that Israel has agreed to also suspend its bombing campaign while negotiations continue.
The most important development that came out of this ceasefire is that the US is now willing to negotiate on the basis of Iran’s 10-point plan, with Trump saying that it is a workable basis on which to negotiate. Beyond the sound, fury and constant threats, this does seem at face value a massive capitulation by the US President to the new reality of Iran’s leverage on the Strait of Hormuz chokepoint. While the full details of Iran’s 10-point plan is not completely known, new reports suggest this include guarantee that Iran will not be attacked again, a permanent end to the war, end to Israeli strikes in Lebanon, lifting of all sanctions on Iran, end to all regional fighting against Iranian allies, and for Iran to impose toll fees for ships transiting through Hormuz.
These negotiations and a pulling back from the brink is certainly a positive including for Asia which has been and continues to be disproportionately hurt by a Strait of Hormuz closure.
Nonetheless, while the probabilities have shifted in favour of a meaningful re-opening of the Strait of Hormuz over the next two months, we are still cautious on the risks for Asian economies and FX and rates markets for a few important reasons.
First, while both the US and Iran have stated that they are using Iran’s 10-point plan as a basis for negotiations, the demands over there seem hard for different parties including Israel and the Gulf states to accept. As such, we think any agreement on paper will likely be an extremely unstable equilibrium, and we think further meaningful bouts of volatility are more likely than not moving forward. It also is unclear what Iran will give up to the US and Israel in return and whether Iran’s nuclear facilities and missile programs are on the table as well.
Second, even if the Strait of Hormuz were to open today, in practice it will take some time for flows of fuel energy to take place given that there have already been significant shut-ins by many Gulf oil producers, and restarting these oil wells and gas infrastructure is not like turning on a tap and will take time. In addition, the binding constraint for now is still ships and risk aversion through insurance companies, and over there it will likely also take time for full normalization. Some analysts place full recovery at the earliest 3-6 months, with petrochemicals sector the worst hit.
Both these points matter greatly for Asian economies as the physical disruption to fuel and energy flows become much more salient the longer flows from the Strait of Hormuz are impeded. Our baseline forecasts already assume a de-escalation in April and we are now cautiously optimistic that this looks more likely, but we think that the left tail risks are still meaningful for the reasons mentioned above. As such, we think it would still make sense to stay with our Asia currency preference of the likes of CNY and MYR and remain cautious on the likes of INR, PHP and THB notwithstanding how the Iran conflict and negotiations will play out.