In a recent Eurizon SLJ Capital research note, Stephen Jen examines the market implications of the Iran War as it passes the two-month mark and the U.S. becomes more committed to blockading the Strait of Hormuz.
Stephen argues that the conflict has entered a new phase. Rather than a purely kinetic contest, the situation increasingly resembles an endurance test, with oil supply and economic resilience becoming central to the outcome.
As Stephen writes:
“The contest there has switched from a hot kinetic type to one of endurance. Instead of oxygen, both are starving for crude oil. Each side thinks the other would run out of oxygen/oil first. I think Iran will eventually lose.”
The note also highlights the differing sensitivity of major economies to higher oil prices. While the global economy is less reliant on hydrocarbon fuels than in previous decades, Stephen argues that the U.S. is now materially less vulnerable to oil shocks than Europe or Asia.
This has important implications for currencies. Stephen remains structurally bearish on the dollar, but notes that the current geopolitical setting could create a temporary counter-trend rally:
“I’ve been bearish on the dollar for two years. I am still structurally bearish on the dollar: the US cannot sufficiently rebuild its manufacturing sector without a more fairly valued dollar, which, based on our calculations, is still overvalued.”
He adds:
“However, in this extraordinary situation, there is scope for the dollar to stage a temporary counter-trend rally.”
The research note also considers the outlook for oil prices over the medium term, the policy challenge facing central banks, and the potential market implications for U.S. equities, bond yields, USD/JPY and broader risk assets.
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