00:00The headlines that have been happening today, the back and forth, the whiplash that we've seen in markets, how are
00:06you making sense of that from an FX perspective?
00:09First of all, thank you so much for having me back.
00:11But I think it's a very clear sign that markets are purely now hinged on the duration and the extent
00:18of the conflict.
00:19Everyone's just waiting for signs of that.
00:21But it did show a very clear sign that markets are also very happy and willing to fade the moves
00:26you've seen in the last couple of weeks.
00:27And they're looking for that glimmer of hope and optimism in hopefully the good headlines you've seen come over the
00:32in the morning.
00:33Hopefully, if they get dragged out, then potentially you could see maybe outside of the oil market, other asset prices
00:39could go back to where they were.
00:41Oil markets are potentially the only ones where we see some permanent risk premium will remain embedded.
00:46Given some of the energy infrastructure, which has been destroyed, maybe the new baseline for oil prices is not 60
00:52anymore, but closer to 80.
00:54But outside of that, asset prices, other than that, might be able to go back.
00:58You said permanent risk premia.
01:00I mean...
01:01A little bit more medium term, not in the sense that it would remain...
01:03Okay, not permanent permanent forever.
01:04Yes, but it would likely remain for a few years, especially because some of the energy infrastructure, which is destroyed,
01:08it will take time and years to rebuild that.
01:11And even if there's a ceasefire, think about it.
01:13Like, you cannot do away with the risk of Iran feeling emboldened and then attacking again.
01:18Can we go there?
01:19Because I think it's safe to say, any of us who remember 9-11 or just think about the region
01:22as a whole, and you think about Iran's history with the United States, it's not been a good one for
01:28a long time.
01:29And you do wonder, do you leave a country, an entity, a regime that is even angrier at the United
01:35States?
01:35And I don't know that we can get a read on that yet.
01:38I think even the president was talking earlier, did we overhear him saying something like, that maybe he and whoever
01:45the next leader would be kind of having say in what happens in Iran next.
01:49So there's just a lot of interesting things going on.
01:52But are we wrong to think about, have we created a bigger enemy here?
01:56And maybe some disconnect, too, with the region as a whole, beyond Israel, who probably maybe weren't prepared for all
02:04of this fallout and destruction.
02:06The way we're seeing risk scenarios right now, there's only two probable outcomes.
02:10One is potentially a continuation of the good headlines you've seen, where potentially both sides have some sort of a
02:16ceasefire, like come to some terms and agreements on the basis of that, and both sides will be able to
02:21claim victory from that.
02:22I'm sure the U.S. will say that we have eliminated part of the supreme leaders there, but Iran will
02:27also be able to claim victory in a certain sense.
02:29So both sides get that.
02:31Asset prices come down in that environment, we actually expect a good amount of selling pressure on the dollar to
02:36resume.
02:37That's one scenario.
02:38What's the other one?
02:39The other one is potentially if the talks do not go well, potentially this becomes a much bigger conflict, potentially
02:45bringing in a little bit more of the peers who've currently stayed on the sidelines.
02:49You bring in more peers, get them involved, and this becomes a very long-term strategic battle then.
02:55It's not just short-term, but it becomes a much more long-term strategic point, and that's where a nuclear
03:00chain reaction potentially sets off.
03:02Because right now, markets have – outside of oil prices and then rates last week, equities and effects have been
03:08relatively very well contained.
03:10You've not seen the classic risk-off even to this state play out.
03:14And then that is something that actually plays out, and then it wrecks havoc on the markets.
03:19Why haven't we seen that classic risk – why haven't we seen that play out?
03:23I think it's because of the nature of the way the shock started out.
03:26I'm sure a lot of people were expecting it to be a quick one-and-done like Venezuela.
03:30I'm sure even the U.S. administration was expecting that.
03:32And nobody was expecting Iran to retaliate the way they have, or even expecting the kind of military strength that
03:37they have showed that nobody knew that they had all of that.
03:40So in that environment, even now, people, given that this is a midterm election year, Trump has wanted the Fed
03:46to cut interest rates.
03:47The inflation price and prices shooting higher is not good for the administration, both geopolitically.
03:53Obviously, NATO has declined to help.
03:55I think that's a very strong sign.
03:57So there's weak support both domestically and globally, which is why people were hoping that potentially this is something which
04:03is like Israel-Iran back in June 2025,
04:05where you had a shock to prices, but that lasted only a few weeks, and then everything came back down.
04:11Right now, when I'm speaking to investors, they're extremely split.
04:14There's a good chunk of them still in that baseline, and some of them have moved to that bad case
04:19scenario.
04:20But given the massive amounts of uncertainty, people are just stuck in the middle,
04:23and they have not been able to put on active risk behind any of those scenarios.
04:27So where do investors want to go?
04:29I mean, we've been watching, you know, the U.S. dollar really, really closely, which we've seen under pressure,
04:35and then we saw a rally coming off of this war.
04:38So I don't know.
04:39Do you have a long and short or short and long-term thought on it?
04:44And how much conviction do you have on those?
04:46Or again, it goes back to these two scenarios.
04:48In the short run, remain defensive.
04:51You know, keep – the dollar should remain tactically bid.
04:53You know, it's not just because dollar is a safe haven, and there's still a big question as to whether
04:58it has been behaving like a safe haven or not.
05:00But the nature of the shock allows the dollar to behave like a safe haven because the U.S. is
05:04geographically insulated from all of this,
05:06energy independent, not as driven by tourism or supply chain, interlinkages with the Middle East compared to the European Union.
05:15So the nature of the shock should allow the dollar to behave like a safe haven tactically,
05:18but I'm still not convinced that this dollar bounce should turn into an outright rally.
05:23And one very interesting evidence which I point out in that is if you just pull up the dollar chart
05:28since the start of the year,
05:29look at the dollar sell-off which happened when Trump and the U.S. only threatened to invade Greenland,
05:35did not even invade it, and when the Fed did the rate check on behalf of the Ministry of Finance
05:39in Japan.
05:40The dollar sell-off you saw in that time was still much stronger than any dollar rally you've seen
05:46with this actual conflict in the Middle East in the last three plus weeks.
05:51So if all of this, you know, if you get that off-ramp through the war in the summer,
05:56imagine the amount of dollar selling pressure which will come back with a lot more intensity
05:59because the hedge of America trade will be back with a lot more reasons to justify it now.
06:04J.S.T., we're going to be speaking on our program a little after 4 o'clock to Ed Harrison
06:08about gold,
06:09but you mentioned the dollar potentially acting as a safe haven.
06:12We've seen the opposite from gold over the past few weeks.
06:14Why is that?
06:17That's actually a very intriguing question, and I love to answer it because the gold,
06:22we do know that retail investors did get very active in participating in that market,
06:26particularly in December and January, which was responsible for the massive chunks of move you saw then.
06:32FX markets to this state have still been the most macro-fundamentally driven market,
06:37untouched by retail investors or speculative moves as much.
06:40That's why FX markets to me have been the most macro-moving markets in all of this,
06:46which I think is a very good sign for me to make sense of when things are moving,
06:49when things look too stretched.
06:51You mean a better indicator of what's going on?
06:53Because the move in gold did have retail investor participation, the euphoria, the momentum,
06:58the formal trades at some times, but that was never seen in FX.
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