Risk-off intensifies with no end in sight to energy supply halt

JPY: Yen starting to benefit from wider risk-off

The sustained attacks on Iran and its ability to return fire is fuelling increased risk aversion and Asian equities today are a lot weaker with the Kospi down 12% and Thai equities down 8%. Other markets are down mostly between 2-4% as investors start to price the prospect of a more substantial hit to economic growth. The US authorities have tried to ease concerns stating that ships can be escorted through the Strait of Hormuz but that has been viewed as not likely to resolve the issue. Other plans also have flaws – see below.

The US dollar remains the top performing G10 currency (see below again) with the Canadian dollar the next best followed by the Japanese yen. If risk aversion continues to intensify and we begin to see more substantial safe-haven flows to the UST bond market, the yen is likely to be begin performing better. It’s performance in these periods should always be viewed through how UST bond yields are moving. An inflation shock that raises yields is yen negative while sharp equity falls that drives capital to UST bonds and lowers yields will usually result in yen outperformance, possibly less so against the US dollar and Swiss franc but certainly against the rest of G10.

BoJ Governor Ueda has been speaking this morning in the Diet and did repeat the usual comment that the BoJ would raise the key policy rate if the economy evolved as the BoJ expected. However, there was obviously an added factor in determining the outlook for policy with Governor Ueda stating that the conflict in the Middle East could have a “significant impact on the global economy” and therefore the Japanese economy. Expectations of an April BoJ rate hike have held up reasonably well given current circumstances – a hike then is currently priced at 15bps versus 17bps last Friday. That will certainly come down we believe if the conflict persists as it would be difficult for the BoJ to hike in these circumstances.

That could weigh on yen performance but if the BoJ is not hiking because global conditions are worsening and global equities are declining then the negative impact on the yen will be less.

There is the added risk of yen intervention at weaker levels that could also discourage yen selling. Finance Minister Katayama today spoke of the “shared understanding” amongst G7 countries that currencies should move in a “stable manner” and given intervention in current circumstances would be easier to justify, the MoF would likely be encouraged on a move toward the 160-level. However, the scale of yen strength due to mass liquidation of yen short positions will be less given positioning has been lightened considerably prior to the conflict. As of last Tuesday, Leveraged Funds’ short yen position had been reduced to the smallest size since August last year.

CAD & JPY NEXT BEST G10 CURRENCIES AFTER USD THIS WEEK

Source: Bloomberg; week-to-date rates vs USD as of 07:35 GMT 4th Mar 2026

USD: Can the oil price be stabilised?  

The primary contagion channel into the broader financial markets remains energy prices – in this scenario both crude oil price and natural gas prices. The FX impact itself is pretty clear – the above table indicates the returns over the first five days of at least a 3 standard deviation move from the average over a 200-day period. The move on Monday and again yesterday were the 22^nd and 23^rd episodes of 3 standard deviation moves higher in data going back to 2007. As expected, there is a broad gain for the dollar versus most of G10 with the returns for the dollar against the Canadian dollar and yen less compelling. The Swiss franc in fact outperforms the dollar. 

Having two days in a row of big moves certainly produced evidence of greater risk-off trading yesterday compared to Monday. Action to halt the surge in crude oil prices would certainly help diminish the risks of a broader market risk-off becoming more pronounced. With Qatar natural gas production shut, curtailing the surge in natural gas prices will certainly be difficult. But for crude oil there are some options given most production has continued and the real issue is the inability to pass through the Strait of Hormuz. Bloomberg has reported that Saudi Aramco is attempting to shift more crude supplies to Yanbu, a port on the Red Sea on the Western side of Saudi Arabia. This is not risk-free given it’s much closer to Yemen and the Houthi rebels. Furthermore, at best this will allow some shift in supplies but certainly not all the supply impacted by the Strait of Hormuz closure.

Bloomberg also reported that the IEA is considering its own action to try and help contain the surge in prices. It was reportedly holding a meeting yesterday to discuss a possible release of inventories. OPEC+ also has capacity to increase production beyond the 206k announced at the weekend although with much of any increased production potentially impacted by the Strait of Hormuz blockage, OPEC+ action may not be seen as having much impact on easing supply concerns. Another option of course would be for the US navy to potentially attempt to police and escort tankers through the Strait although that would still involve high risk of attack. The impact of the closure of the Strait of Hormuz was highlighted by the forced closure of a number of oilfields in Iraq (including one of the biggest in the world – the Rumaila field) due to there simply not being the available vessels to ship the crude.

President Trump yesterday acknowledged that oil prices were “a little high” but that prices would drop as “soon as this ends”. The problem is that Iran will be fully aware of high oil prices potentially constraining Trump’s appetite for a long war and without ‘boots on the ground’ Iran may be preparing to hold out for as long as possible which points to the potential for further upward pressure on energy prices.

In our updated forecasts this week, we lowered our end-Q1 EUR/USD forecast from 1.2000 to 1.1500 and we could yet see EUR/USD extend lower beyond that level as crude oil advances toward the USD 100 p/bl level. In 2022 it took four weeks after the Russian invasion of Ukraine for the dollar to advance by 2.3% - and in less than two days (to yday’s high) the dollar was 2.1% stronger. The impact on energy supplies is much clearer more quickly now than what Russia was planning with natural gas supplies, which took longer. It wasn’t until June 2022 when Russia first formally announced a cut in supply (due to a turbine part unavailable due to sanctions). If the Strait of Hormuz remains blocked, faster gains for the dollar than in 2022 is likely.

G10 FX RETURNS FOLLOWING A 3-STD DEV MOVE HIGHER IN CRUDE OIL

Source: Bloomberg & MUFG Research

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com