Ahead Today
G3: Dallas Fed manufacturing activity, Germany CPI
Asia: India industrial production
Market Highlights
The duration of the US–Iran conflict and the severity of damage to Middle Eastern energy infrastructure remain key variables for global markets. Recent developments increasingly point to a potentially more protracted conflict, extending beyond the 4–5 week timeframe previously signalled by President Trump. There is also a risk that the conflict enters a more dangerous phase, with reports of US ground troop build-ups in the region raising the possibility of targeted raids involving Kharg Island - Iran’s primary crude export terminal - and areas around the Strait of Hormuz.
A protracted conflict increases the likelihood that energy risk premia remain in markets for longer. Reports suggesting that Iran may be considering a tolling mechanism at Hormuz further raise the prospect that disruptions to global energy flows could persist even beyond the end of active hostilities, keeping uncertainty around energy supply availability elevated.
For markets, the conflict remains broadly USD supportive. Risk off sentiment, combined with the risk that higher energy prices could feed into US inflation and keep US rates higher for longer, continues to underpin the dollar and reinforces headwinds for risk sensitive assets.
Regional FX
High-beta and oil-sensitive Asian currencies are likely to remain the first line of pressure whenever energy related headlines deteriorate. Currencies such as the INR, PHP, KRW, and THB are particularly exposed given their reliance on imported energy and sensitivity to higher oil prices through both inflation and current account channels. As oil volatility rises, these FX are more prone to underperform, especially during periods of broader risk aversion. The risk of prolonged Middle East conflict is also starting to weigh more on CNY, SGD, and MYR.
Key developments to monitor include 1) any conflict escalation including US ground attacks on Kharg Island or in areas near Hormuz, 2) the implementation of a tolling system in Hormuz by Iran, which would create uncertainty around energy supply availability, 3) the spillover effects of higher energy prices on US and Asia inflation, including second-order effects via higher transportation and food inflation, and 4) any credible signs of conflict de-escalation.