USD rebounds modestly after US-Iran talks fail

USD: US-Iran talks fail & Trump threatens to blockade Iran’s trade

The US dollar has rebounded modestly at the start of this week after the US and Iran failed to reach a peace deal over the weekend. The negotiations reportedly broke down due to differences over the future of Iran’s nuclear program. President Trump has since stated that he doesn’t care if Iran returns to the negotiating table. He has also threatened to implement a blockade of all maritime traffic entering and exiting Iranian ports from today at 10 a.m. Washington time, but will allow other vessels to transit the Strait of Hormuz if they’re not stopping in the Islamic Republic. In response Iran’s military adviser Mohsen Rezaee has warned that it “will not allow” such an embargo and noted it has “great untapped leverage to counter it”. The latest developments have increased the risk that the Middle East conflict could escalate further in the near-term. President Trump has threatened to retaliate in the event of Iranian resistance to the blockade. The US blockade is intended to increase economic pressure on Iran to reach a peace deal but will take time to become more effective. However, all hope for a diplomatic resolution is not completely lost. A spokesperson for Iran’s Foreign Ministry stated that they had reached an understanding on various issues but disagreements remained “on two or three key points”. The spokesperson added that “it was natural that one should not have expected to reach an agreement in a single session from the outset” and that “diplomacy never ends”.

The failed peace talks and President Trump’s threat to blockade all shipments from Iran have helped to lift the price of Brent crude oil back above USD100/barrel overnight hitting a high of USD10.387/barrel. The temporary ceasefire is even more fragile now after the failed talks over the weekend. The disappointment amongst investors has also triggered a partial reversal of the strong gains from last week for high beta currencies. The worst performing G10 currency overnight has been the Swedish krona which has fallen by around -0.7% against the US dollar. It marks a partial reversal of last week’s gains when the krona strengthened by 2.5%. Similarly, the worst performing emerging market currency has been the rand which has fallen by around -0.8% against the US dollar after strengthening by around 3.4% last week. Overall, the negative market fallout has been relatively subdued so far highlighting that market participants are still hopeful a deal can be reached to end the conflict.            

POLITICAL CHANGE HAS SUPPORTED HUF & PLN

Source: Bloomberg, Macrobond & MUFG GMR

EUR/HUF: Positive political change for Hungary and Europe

The other main development over the weekend was the election result from Hungary which has brought an end to Prime Minister Viktor Orban’s 16-year grip on power. The main opposition Tisza party led by Peter Magyar won a decisive victory and is currently on course for a supermajority. With 99 per cent of the votes counted, the Tisza party is projected to win 138 out of 199 seats in parliament. The two-third majority would enable it to make changes to the constitution. In contrast, it was a heavy defeat for Viktor Orban’s Fidesz party who projected to win only 55 seats compared to the 133 seats it won at the last election in 2022. Support for the opposition party was boosted by the high turnout of 78% which was the highest in any general election since the fall of communism in the 1990’s. The clear results have already prompted Viktor Orben to concede defeat which has removed initial fears that he would attempt to cling on to power. In his concession speech to party supporters, he stated “whatever happens we will serve our country and the Hungarian nation from opposition as well”.             

If the Tisza party is able to secure a two-third majority it would enable new Prime Minister Peter Magyar to more easily dismantle the Orban system. He has already vowed to oust Orban’s key loyalists such as the president, top justices, the chief prosecutor and heads of several state regulators. He also plans to eventually pass a new constitution, change elections rules that were widely seen as favouring the Fidesz party and take the public media’s news coverage off air until balanced political coverage is restored. The changes will return Hungary back towards the European mainstream, and help to unlock more than EUR20 billion of EU funds that have been frozen due to concerns over the rule-of-law and corruption. He has also vowed to introduce a two-term limit for prime ministers to prevent Hungary from reverting to authoritarian rule. It should also make life easier for the EU. Under former Prime Minister Viktor Orban, Hungary blocked a EUR90-103 billion loan package intended to support Ukraine, and has repeatedly delayed or blocked EUR aid and sanction related to Ukraine. 

The positive political developments have triggered a powerful rally for the forint which has strengthened by over 2% against the euro and US dollar. The price action reinforces the forint’s position as one of the best performing emerging market currencies this year. Similar price action was evident after the election victory for Prime Minister Donald Tusk’s Civic Coaliton in October 2023 which returned Poland back towards EU norms. The zloty has since strengthened by around 5% against the euro, and has remained at stronger levels than prior to the political shift.            

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com