US-Iran talks: tick, tock, TACO?

While the ceasefire and negotiations between the US and Iran are welcome, the prospect of a lasting settlement is being overestimated, according to Valentin Marinov, head of G10 FX research and strategy at Crédit Agricole CIB, although the détente could still support markets.

Beyond immediately apparent risks, such as ceasefire disruptions, the market underappreciates fundamental differences between the two principal parties, he says, most importantly that Iran will not give up the nuclear capabilities that the US insists be removed.

Should agreement then not be reached in 60 days, each side will seek to exert pressure on the other again, Marinov anticipates, with Iran seeing the Strait of Hormuz as its strongest bargaining chip, and the US viewing a renewed blockade as a key lever for putting pressure on Iran.

“Based on that, our central prediction is that we will see only a partial reopening, at best,” he said. “The Strait of Hormuz and Gulf of Oman will be reopened to maybe 80% of what was the case before and that may remain the case for the foreseeable future.

“So while oil prices have already dipped below 80 dollars per barrel, I don’t think we’re going to go on a sustained path back towards the 50 or 40 we had before the war.”

At the same time, Marinov highlights how markets have reacted much more moderately to the crisis than was the oil and energy price shock seen in 2021 and 2022, the latter as a result of the Ukraine war. This he attributes to the TACO trade — Trump Always Chickens Out — born out of the tariff climbdown post Liberation Day.

He sees this coming into play again if the negotiations unfold as he foresees.

“It’s very difficult to predict what the Iranians are going to do. But it is with a certain degree of confidence that we are able to predict that the Trump administration will only push the conflict so far, until they are able to control oil prices.”

To this end, he points to the US’s Strategic Petroleum Reserve, which it can use to contain spikes in the price of oil. This has fallen by around 50m barrels, from some 420m barrels pre-conflict to less than 370m, towards levels seen in 2023, which were in turn the lowest in 40 years.

“So it’s not surprising that Trump was already trying to push the Iranians for a deal,” said Marinov.

“My assumption is that the US won’t be able to rebuild its oil reserves quickly, such that if the crisis were to resurface in 60 days, Trump will be more willing to compromise, or kick the can down the road. The markets will believe him and the TACO trade will live.”

The successful dampening of any oil shock would meanwhile lessen inflationary pressures on both sides of the Atlantic. Combined with the arrival of new Federal Reserve chair Kevin Warsh, this should minimise the likelihood of a near-term rate hike in the US, according to Marinov.

“It could also mean that the ECB don’t have to hike as aggressively,” he adds. “Ultimately, they don’t have to worry about inflation as much, and potentially should worry a bit more about the growth outlook.”