Iran conflict could push Oil futures towards $100 a barrel, EM currencies 'vulnerable'

While the timing and scale of the US military action on Iran will have caught many off guard, the immediate fallout could be relatively contained given that: a) this risk premium was already partly embedded in markets, and b) the fact that the attack occurred when markets were closed. That said, risk off trading is likely to dominate for now.

The US dollar should catch a bid on risk aversion and higher energy prices, with the Swiss franc likely to follow suit. Emerging market currencies, on the other hand, appear vulnerable, particularly those that are heavy net importers of oil.

Typically, rising geopolitical risks trigger no more than temporary dislocation, and markets usually recover fairly quickly once the shock subsides. This will be highly dependent, however, on a number of uncertain factors, namely the duration and breadth of the conflict, and the status of the Strait of Hormuz.

An outright full closure of Iran’s premier shipping lane is arguably the biggest risk for markets and could, we think, send oil futures surging towards the $100 a barrel mark.