Snowballing Away
- 23 June 2025 (7 min read)
KEY POINTS
The crisis in the Middle East has escalated further, with the direct involvement of the US. In the short run, the market reaction will be driven by the magnitude of Tehran’s response. There is no palatable option for massive retaliation, and a rational calculation, on balance, would conclude to a limited reaction by Iran. Yet, the odds for the medium to long-term scenarios are much more widely distributed. Following Ilan Goldenberg’s analysis in Foreign Affairs, Tehran can consider that the cost/benefit balance of the nuclear programme has changed and that it is time for a policy re-set entailing full cooperation with international institutions and détente with Israel and the US. In his pessimistic scenario though, the hardliners would win the argument and calculate that continuing the programme is the best chance of preserving the regime. This would likely force a lasting involvement of the US, i.e. a further break from D. Trump’s isolationist preferences.
The first indications from the market on Sunday night pointed to some moderate strengthening of the dollar. We will want to see beyond the “knee-jerk” reaction and see if the pattern from last week – when US assets did not benefit from the usual “flight to safe haven” behaviour – holds. This could partly be the result of the market concerns about the US overall policy stance. The Senate has moderated the House’s plans on some aspects – crucially on Section 899 – but it is far from clear at this stage if the final bill will differ much from the initial version in terms of fiscal sustainability.
Crossing the Atlantic, we explore Swiss monetary policy. A key point there, in our view, is that the resilience of exports to currency appreciation – a key Swiss asset – cannot justify benign neglect on FX issues, since even strong economies cannot shrug off deflation. The Euro area cannot even necessarily count on such export resilience. Actually, “real time data” based on seaports activity points to weak exports in Q2 already.
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