Waiting to see what happens in the Middle East this weekend
I have so many questions.
highlights
Tensions
Current Views
Long 12MAR 177.50 EURJPY put
for ~32bps off 182.30 spot
Iran, so far away
The primary short term theme here is the possibility of an attack on Iran. The U.S. is moving all sorts of ships and assets to the Middle East.
Prediction market odds (today’s first visual) show a rising, but still not super high probability of something imminent.
While geopolitical events of this nature are often not worth trading, there is some angst that this particular attack might be less like the June 22, 2025 attack (surgical one off) and more an attempt to trigger regime change. That would mean a more prolonged conflict with higher stakes and there’s always the chance of something bad going down in the Strait of Hormuz.
The oil market has gone from “Unlimited supply, oil is going to $40!” to “There is not much spare capacity” in the span of a few months. The excellent Helima Croft at RBC says, for example:
All of this is occurring against a backdrop of thin OPEC spare capacity shock absorbers. One leading regional official noted that the July 2008 run-up in oil prices to $148/bbl was driven by fears of no spare capacity. We continue to contend that the only meaningful spare capacity is sitting in Saudi Arabia, and if OPEC does decide to bring forward more production in the spring, the cupboard will be exceedingly bare if there are any major supply disruptions stemming from a US/Iran conflict — especially if Ukraine continues to target Russian (and by extension Kazakh) oil assets. Again, one side may yet back down, but the standoff appears to be approaching an Ides-of-March moment.
It is good to have a plan ready in case there is news this weekend. Note that looking back at what markets did in June 2025 is not particularly useful because that attack was viewed as the end of the fracas, not the beginning. Therefore, ILS was the best -performing currency while the rest of G10 and EM didn’t do much.
Given the potential for a more protracted and scary conflict this time (and the always-present fear of kinetic flareups in the Strait of Hormuz), here are my best guesses for how markets would react to an attack this weekend.
- CL up 7% to 70.60
- Stocks down 1.2%, VIX up 3
- EURJPY down 1.2%
- AUDUSD down 1.2%
- EURCHF down 0.7%
- USDJPY down 1.0%
- Bonds all over the place because it’s scary (bullish bonds) but inflationary (bearish bonds)
- Gold up but not as certain as it used to be given positioning and the bursting of the silver bubble
- INR weaker
- BTC 61,000
These are guesses that assume no disruption in Hormuz. That would trigger much larger moves. If you disagree on any of these, I am happy to hear your view.
Currencies
The USD shorts are unwinding at a faster pace now as CTAs get involved after gorging on EUR and AUD for a few weeks. This is almost purely a mini positioning event; rate differentials and macro have not really changed. The market just got too excited after the Trump weak USD comments. The blowoff tops in precious, the dovish RBNZ, and the raging resilience of USDJPY on importer demand and modestly higher yields have contributed to the USD bid at the margin, but mostly this is just about positioning and consolidation.
If you still like the short USD idea, you could be patient and wait for 0.6920/0.6950 in AUDUSD. There does not seem to be much point in adding risk ahead of this weekend’s uncertainty surrounding the Middle East. Today feels like a good day to stay out of trouble and wait for a coherent opportunity. Right now, AUDUSD is on micro support, with a nearly 100-pip air pocket just below. A huge rinse to 0.6910/30 would clear the weakest longs and offer a much stronger entry point for AUD bulls.
Final Thought
I’m going to Northern Ireland this summer and have always been fascinated by The Troubles because they were constantly on the news when I was a kid (and I am of Irish descent). In preparation, I am reading books and I would highly recommend: “Say Nothing”— if you’re interested in the topic of Northern Ireland in the 1970s. It’s well-written, fast-paced, educational, exciting, inspiring, and sad.
Today is a good day to call your mom.
I have so many questions.
Is it that not everyone can agree on whether the others are dazzling?
Some are merely scintillating?
What is the actual number? 39? 205?
HT SkD
