The US and Iran reached an interim agreement to reopen the Strait of Hormuz, with both sides meeting in Switzerland on 19 June to formally sign it. This follows a whirlwind weekend where at times a deal seemed out of reach not least because of Israel’s bombings in Lebanon. The announcement first came from Pakistani Prime Minister Shehbaz Sharif, and this was followed by Trump and Iranian media, with different sides as usual framing the deal in their own terms. Markets continued moves that started heading into the weekend, with Brent oil prices falling sharply to US$84/bbl, risk assets gaining meaningfully, while Asian currencies that have been weighed down most by the Iran conflict such as INR, IDR, and PHP outperforming.
While it is certainly good news for the global economy and Asia that a deal has been announced, whether this sticks and remains viable depends among other things on the details of the negotiated terms, which are not out yet. There have been a range of unconfirmed drafts in news reports, and while all contained key elements including re-opening the Strait of Hormuz, giving Iran sanctions relief and opening the door to longer-term negotiations around its nuclear program, there were key points of divergence including how much financial relief Iran would get.
Indeed post the announcement of a deal, both sides were already casting the deal in different light. For instance, Iran said that ships passing through the strait would be regulated by Iran and Oman – suggesting that Iran would seek to retain some control over the Strait. In addition, Iran said that during the 60 days of negotiations it would seek the removal of all primary and secondary sanctions, as well as resolutions against Iran – decisions which would likely require Congress approval and which is as such far from certain. The level of financial incentives for Iran and who pays for them also remains unclear. Most crucially is the issue of Israel and how it conducts its future operations on Lebanon – a flaring up of tensions would likely throw some spanner in the works not just in the near-term but also over the medium-term.
But…. we’ll take good news as it comes and in a war in which sadly the poorest and most vulnerable, coupled with many in Asia were affected disproportionately – and as the world also happens to head into the World Cup season.
From an Asia FX perspective, in a sustained scenario of re-opening we think the risk-reward for the likes of currencies such as KRW to do better moving forward is quite high, given how much KRW has already underperformed, coupled with increasing pushback on currency weakness from South Korea authorities and with the central bank also turning more hawkish. We are forecasting USD/KRW moving towards the 1400 handle over time and for the Bank of Korea to hike rates twice this year. Asian currencies such as INR, IDR and PHP which have underperformed may also start to reverse some weakness, but over here we think that local factors will also matter significantly in whether this reversal in currency weakness is durable. In Indonesia’s case for example while Bank Indonesia has turned more hawkish and this has provided some support for the currency, it remains to be seen whether investor concerns around Indonesia’s fiscal sustainability will be addressed moving forward. In India’s case, we see a good chance for RBI’s measures to work in drawing capital inflows moving forward, and we as such see USD/INR moving towards the 94.00 handle over the next few months, with a reopening of the Strait of Hormuz a potential additional catalyst.
