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Today’s The FX Trader from yours truly. It might just be deleveraging, but there is also an element of the “energy overlay” angle on markets.

Is US policy in Iran “Let’s mess around and find out.”? The New York Times covers how Trump moved (and was moved) in favour of war with Iran. The money quote on what the administration hopes the outcome will be (scenario one was an even harder line cleric doubling down on nuclear ambitions, scenario two was a democratic uprising from below seen as low odds) concerned a “third scenario” for what the attacks to dismantle the Iranian regime or at least all nuclear ambitions might achieve: “A number of senior Trump administration officials seized on a third scenario: that a faction of the Islamic Revolutionary Guard Corps more pragmatic than the hard-line clerics might take power. Even though a cleric was likely to still be nominally in charge, that group of I.R.G.C. leaders would actually lead the country.” It’s a lot to risk when you have no idea what is going to happen and don’t care to put boots on the ground to ensure a specific outcome. I suspect Trump’s moving forward was helped along by a dizzy-with-success moment post-Venezuela, as well as a YOLO lack of caution given his extremely weak polls after the Minnesota ICE killings and posturing and threats on the Greenland issue. Might as well risk it all since doing nothing guarantees a weak showing for his faction at the mid-terms.

Meanwhile, the drumbeat of AI marches on. And glass-half-full speed-talking Marc Andreessen is worth listening to for an optimistic take on the future that he believes AI will bring about - as he argues that we will see a steady and considerable, but not massively disruptive, AI productivity boom that will be mostly for the good.

What if not even a ceasefire is not going to help anything? Energy industry expert Anas Alhajji weighs in on risks of fallout if Strait of Hormuz “closure” or at least effective cessation of shipping and especially LNG and other production for more than a couple of weeks.

Chart of the Day - USDZAR

Emerging market exposure has been all the rage this year, and South Africa and its currency the rand (ZAR) have benefitted from the rotation into emerging markets as well as the enormous ramp in precious metals prices, especially platinum as the country is the world’s dominant (70-75%) producer of that metal. The South African stock indices managed to punch to a new marginal all-time high yesterday before rolling over a bit and then seeing an enormous swoosh lower of 5% today. There is a triple whammy of negative impacts at work here: long EM’s is a strong consensus trade, in part driven by the weak US dollar, also a consensus trade. That trade is blowing up, as are precious metals in today’s markets, which were also in part driven by the USD devaluation/debasement narrative. Platinum is down around 10% today as I am writing this. Nothing hurts more in a general deleveraging environment like the one this Iran conflict is driving than getting caught in a crowded trade. Below is a chart of the South African Rand, where the short positioning clear-out is under way (and adds to the woes of exposure to South African stocks and bonds). Given past squeezes on trades like this, there could be considerable further pain for long ZAR and long precious metals trades from here. Elsewhere, I have wondered in my FX update if this deleveraging phenomenon might also trigger some repatriation flows back into Japan and a stronger JPY as well, but so far that effect has been modest, with the JPY stronger in the crosses, but not exactly shooting the lights out.

Questions and comments, please!