U.S.-Iran De-escalation Supports Weaker USD; Nomura Adjusts FX Trade Portfolio

Overview

This report analyzes the market impact of the impending interim agreement (memorandum) between the U.S. and Iran, arguing that this development supports the strategic de-escalation stance adopted since May 22. Despite volatility risks, Nomura remains bearish on the USD and has adjusted its FX trade portfolio accordingly, emphasizing selective USD shorts and relative value (RV) trades driven by local idiosyncratic factors. The report details specific position adjustments and rationale across Asia FX, G10 FX, and Asian rate markets.

Core views

Geopolitics & USD Mainline: U.S. and Iranian officials are set to officially sign an interim agreement on June 19, including the reopening of the Strait of Hormuz. This reduces upside risks to energy prices and reverses the previous logic where deteriorating terms of trade supported a strong USD. Combined with potential outcomes from Fed and BOJ meetings, the report maintains a strategic selective short USD stance, particularly against CNY and TWD. Asia FX Strategy Adjustment: In Asian markets, the report initiates a short USD/KRW position (confidence 1/5), citing easing tensions, increased FX remittances from Korean corporates, and weak retail investor demand for U.S. equities. Simultaneously, confidence in long EUR/INR is raised from 2/5 to 3/5 with a target of 113.80, as EUR is expected to benefit from falling energy prices while INR underperforms due to foreign outflows and widening fiscal deficits. Additionally, confidence in long SGD/IDR is reduced to 3/5 due to risks of BI not hiking rates, social unrest, and potential rating downgrades in Indonesia. However, high-confidence (4/5) short USD/CNH (target 6.60) and medium-confidence (3/5) short USD/TWD (target 30.5) are maintained, supported respectively by undervalued CNY valuations, strong export settlement demand, and fundamental support for Taiwan's tech sector from global AI demand. G10 FX & Rates Views: In G10 markets, a high-confidence (4/5) short AUD/NZD position (target 1.1750) is maintained, based on lower oil prices benefiting New Zealand (a net importer) and the likelihood that the RBA's hiking cycle has ended. Preference is given to trades with low USD and crude beta, such as long CHF/JPY and long EUR/GBP. A long USD/CAD position is also held, as macro fundamental divergence is expected to drive the pair higher. In Asian rates, focus is placed on receiving Korea 2y5y forward rates (confidence lowered to 3/5) and an India Sep 2s5s NDOIS curve flattener trade to capture relative value recovery post-geopolitical risk fade.

Analysis framework

The report employs an analytical framework combining 'macro-geopolitical drivers + micro-local factors.' First, it establishes a macro tone of USD weakness by assessing the impact of the U.S.-Iran agreement on global energy prices and risk sentiment. Second, regarding specific currency pair selection, it deeply analyzes each country's balance of payments, central bank policy expectations (e.g., whether BI hikes, end of RBA cycle), capital flows (e.g., foreign divestment from Indian equities), and valuation models (e.g., CNY REER undervaluation). This top-down directional approach combined with bottom-up target selection aims to capture structural divergence opportunities amidst geopolitical de-escalation.

Methodology notes

• Macroeconomic framework

  Geopolitical Risk Premium and Terms of Trade Transmission

  The report deduces transmission mechanisms to national terms of trade and exchange rates by analyzing the impact of geopolitical conflicts (e.g., U.S.-Iran relations) on energy prices. For instance, falling oil prices improve terms of trade for net importers (e.g., New Zealand, India), thereby supporting their currencies or economic outlooks.

• Quantitative/Factor/Portfolio TheoryBeta/alpha analysis

  Currency Pair Beta Coefficient Analysis

  The report uses Beta coefficients to measure currency pair sensitivity to USD or crude oil price fluctuations. For example, it identifies AUD as a high-beta currency sensitive to equities and commodities, while selecting low-beta pairs (e.g., CHF/JPY) to hedge against geopolitical volatility, reflecting a portfolio construction approach based on risk exposure factors.

• Valuation Methodology

  Multi-Model FX Valuation (incl. REER)

  The report uses four FX valuation models to assess CNY value, specifically noting that productivity-adjusted Real Effective Exchange Rate (REER) indicates CNY is undervalued by 19.9%, serving as theoretical support for long CNY/short USD positions.

Key data

• USD/CNH Target Price6.60End-Aug target, implying ~3% upside, confidence 4/5
• USD/TWD Target Price30.5End-Sep target, implying ~3% upside, confidence 3/5
• EUR/INR Target Price113.80End-Sep target, implying ~4% upside, confidence 3/5
• AUD/NZD Target Price1.1750End-Aug target, confidence 4/5
• CNY Undervaluation MagnitudeAvg 9.7%Based on four FX valuation models; productivity-adjusted REER shows 19.9% undervaluation
• Taiwan May Export Growth51.7%YoY growth, beating expectations, primarily driven by high-tech shipments

Impact & implications

The report argues that signing the U.S.-Iran agreement will significantly reduce the risk of unexpected tightening in global financial conditions and provide tailwinds for economies reliant on tech and domestic demand, such as Singapore. For FX markets, this implies further downside room for the USD index and relative value repricing for Asian currencies and specific G10 crosses. Investors should focus on differentiated performance driven by local fundamentals (e.g., central bank decisions, fiscal conditions) rather than simple correlated USD moves.

Risks

• Disagreements over U.S.-Iran negotiation terms could lead to recurring volatility
• Japan's MOF may intervene if JPY experiences significant volatility
• Indonesia faces risks of a sovereign credit rating downgrade to negative
• Rising Korean equity markets may paradoxically increase FX demand from local and foreign investors

What to watch

• Bank Indonesia monetary policy decision on June 18
• MSCI assessment results on Indonesia security free float on June 18
• Fed Chair Warsh's press conference following the June FOMC meeting
• BOJ post-meeting developments in June and potential MOF intervention