Introduction#

UBS strategists have issued a warning about potential increases in currency volatility in the coming weeks, driven by the ongoing conflict in Iran. This situation threatens to disrupt energy supplies, which could have a ripple effect on global markets.

Rising Oil Prices#

Brent crude oil prices have surged back toward $115 per barrel, with Asian buyers facing prices around $150 per barrel. UBS indicates that if the conflict continues, there is a heightened risk of energy infrastructure being targeted, which could push oil prices even higher, potentially exceeding the peaks seen in 2022. A sustained increase in energy costs could significantly impact markets, with UBS noting that prices reaching $200 per barrel could trigger a global mobility crisis.

Currency Volatility Predictions#

UBS forecasts that currency volatility could increase by 4 percentage points, reaching levels not seen since the COVID-19 pandemic in 2020 and the Ukraine war in 2022. The bank is selectively selling volatility in the short term, focusing on currency pairs that appear attractive, particularly NZD/USD and EUR/NZD.

Central Bank Responses#

Major central banks, including the Federal Reserve and the European Central Bank, have maintained their interest rates while expressing concerns about growth and inflation uncertainties. UBS believes these banks are currently overlooking the rise in oil prices, but this stance may change if energy prices remain high. The Bank of Japan's decision to hold rates steady was accompanied by a more assertive tone regarding future rate hikes, although market confidence in this commitment is low.

Adjusted Forecasts#

In light of increased geopolitical uncertainty and sustained high oil prices, UBS has revised some of its short-term forecasts. They now expect the EUR/USD exchange rate to be around 1.15 by the end of June, down from a previous estimate of 1.20. For GBP/USD, UBS sees limited potential for near-term rate cuts, especially if economic indicators stabilize. Additionally, they have raised their USD/JPY forecasts, anticipating a rate of 155 for June and 152 for September.