Oman’s Foreign Minister, Badr al-Busaidi, said talks between the US and Iran on nuclear issues have made progress, according to Reuters. Negotiations are due to restart at technical level in Vienna next week after an initial consultation phase.
Before the Vienna technical meeting, each delegation will consult with its own government. The aim is to assess the practical details of a possible agreement.
Market Prices Snapshot
In markets, gold (XAU/USD) was 0.14% lower at $5,189 at the time of writing. West Texas Intermediate (WTI) crude was down 0.84% at $64.90.
In financial markets, “risk-on” and “risk-off” describe how much risk market participants accept. Risk-on is linked to buying riskier assets, while risk-off is linked to moving towards safer assets.
In risk-on periods, shares often rise, many commodities may gain, some commodity-linked currencies can strengthen, and cryptocurrencies may rise. In risk-off periods, bonds can rise, gold can perform well, and safe-haven currencies such as the US Dollar, Japanese Yen, and Swiss Franc may benefit.
Currencies often linked to risk-on include the Australian Dollar, Canadian Dollar, New Zealand Dollar, Ruble, and South African Rand. Risk-off tends to support the US Dollar, Japanese Yen, and Swiss Franc.
Implications For Risk Sentiment
The reported progress in US-Iran talks is a clear signal of easing geopolitical tensions, which typically triggers a “risk-on” sentiment in the markets. We are already seeing this reaction with the price of gold falling and oil dropping on the news. This suggests traders are moving away from safe-haven assets and are pricing in the possibility of increased global oil supply.
For oil derivatives, the path of least resistance appears to be lower in the short term. The prospect of Iran adding over a million barrels per day to the market, should sanctions be lifted, creates significant downward pressure on WTI and Brent crude prices. We should therefore consider shorting oil futures or buying put options expiring in the coming months to capitalize on this expected increase in supply.
We saw a similar dynamic back in 2015 when the original nuclear deal was finalized, as oil prices weakened considerably in the months leading up to and following the agreement. Current market data shows crude oil inventories have been building slightly more than expected in recent weeks, adding another bearish factor. This historical precedent and current inventory levels strengthen the case for a continued slide in oil prices as negotiations advance.
With geopolitical risk subsiding, the appeal of gold as a safe haven is fading. The price is already down, and we expect this trend to continue as long as the diplomatic mood remains positive. We should look to sell gold futures or purchase put options, as capital is likely to rotate out of bullion and into assets that benefit from a brighter global economic outlook.
This “risk-on” environment is typically negative for safe-haven currencies like the Japanese Yen (JPY) and the Swiss Franc (CHF). We should anticipate these currencies will weaken against higher-yielding and commodity-linked currencies. Derivative strategies could involve selling the yen against the Australian dollar, which benefits from positive global growth sentiment.
Commodity currencies like the Australian Dollar (AUD) and New Zealand Dollar (NZD) should find support in this environment. While lower oil prices could create some headwinds for the Canadian Dollar (CAD), the broader improvement in risk appetite should be a net positive. We can look at call options on the AUD/JPY pair as a way to gain exposure to this shift.
