MUFG’s Senior Currency Analyst Michael Wan highlights that escalating tensions between the US and Iran, including threats over the Strait of Hormuz (SoH), keep the path to peace narrow and uncertain. He remains cautious on Asian currencies and regional risk assets as Oil supply risks persist, even as some marginal improvements in tanker flows and potential Iraqi exports through the Strait of Hormuz emerge.

Asia FX weighed by Iran conflict risks

"Overall, our continued assessment is that the path towards peace is narrow and unlikely, given the wide gap in expectations among the different parties in this war."

"As such we remain cautious on the path for Asian currencies and risk assets moving forward, but note at least two important developments in oil markets and potentially positive ones notwithstanding continued uncertainty around how the Iran/Middle East conflict will develop: Overall, our takeaway is that it is an improvement at the margin in terms of flows from SoH, and we should watch carefully for how these develop."

"For Asia however, even if the SoH were to reopen completely today, it will take some time for actual supply to come onstream and flow through, with some suggesting at least 3-6 months timeline, with petrochemicals the worst impacted."

"While tactically speaking the war could eventually end from 3 key constraints – Munitions, Markets, and the Mid-terms, how we get there will be important including what the pain threshold is for oil prices to rise further from here."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)