US
President Donald Trump decision to layer a US naval blockade on top of Iran’s de-facto control over the crucial Strait of Hormuz risk prolonging the energy shock, and raise tensions with China, a significant buyer of Iranian oil. Unsurprisingly, Brent crude oil prices rallied back above $100 a barrel, rekindling risk aversion across markets. Stocks and bonds are down, while USD is firmer.
US Central Command (CENTCOM) noted it will begin implementing a blockade of all maritime traffic entering and exiting Iranian ports today at 10:00AM Eastern Time. CENTCOM added it will not impede freedom of navigation for vessels transiting the Strait of Hormuz to and from non-Iranian ports.
The Trump administration’s latest move looks more like a negotiating gambit to reset the bargaining terms of Strait of Hormuz access before US domestic constraints (higher gasoline prices and long-term Treasury yields) force a diplomatic off-ramp. In parallel, the US naval blockade cuts off Iran’s oil export revenue stream and incentivizes countries still receiving energy from Iran – China, India, Pakistan, and Turkey – to press Teheran toward a deal. Richard Haas of the Council on Foreign Relations has dubbed this strategy “Open for All or Closed to All.”
Bottom line: the energy shock may not be over, but we are sticking to our low conviction view that the worst may be in the rear-view mirror. If so, interest rate differentials between the US and other major economies will continue to keep the DXY (USD index) anchored within its nearly one-year 96.00-100.00 range over the next few months.
Long CAD and NOK on the crosses are good hedges against a more persistent energy price shock. Both Canada and Norway get the terms of trade boost and have fiscal space to absorb some of the growth drag to domestic demand.
Hungary
HUF is outperforming across the board with both USD/HUF and EUR/HUF dropping to more than four-year lows. In line with most pre-election polls, Peter Magyar’s Tisza party won a decisive victory against Prime Minister Viktor Orban’s Fidesz party, underscoring a pro-EU policy reset. The Tisza party is on track to secure a supermajority (two-thirds parliamentary majority) winning 138 in the 199 seats chamber. The election result paves the way for constitutional reforms that should ultimately unlock some of the €17 billion in suspended EU funds.
In his victory speech, Magyar said “Hungary will once again be a strong ally in the European Union and in NATO…Hungary’s place is, will be and has been in Europe for a thousand years.” HUF has scope to adjust higher on diminishing domestic political risk premium. Hungary’s election result is also EUR supportive at the margin by reducing EU political fragmentation risk.
