FX Daily Strategy: Asia, March 26th

The choppy trade in DXY will likely give in when we hear any determined breakthrough in the geopolitical front. For now, it looks like Trump is doing things both the diplomatic and military way. With much uncertainty around, it seems Trump is gauging the pros and cons of striking Iran. The inflationary pressure from energy price, subsequent shock to the equities market are what we believe in Trump's mind. We do not think there is clear call but Trump should be more tilted to take an exit if he can get Iran to reopen the Strait of Hormuz. 

On the chart, the anticipated test above congestion resistance at 100.00 has given way to a sharp pullback to congestion support at 99.00, with prices currently balanced in choppy trade around 99.35. Daily readings are under pressure, highlighting room for a fresh test below 99.00. But already oversold daily stochastics and rising weekly charts should limit initial scope in short-covering/consolidation within support at congestion around 98.50 and the 98.65 Fibonacci retracement. Meanwhile, resistance is lowered to 99.50. Any immediate tests above here should meet renewed selling interest beneath 100.00.

While USD is dominating the market, USD/JPY is the pair to watch out for. The pair is quickly approaching the 160 figure and only 1/2 figures away from historical level. Despite the recent pace of JPY weakening isn't rapid, the historical weakness will draw the Japanese officials attention and may see intervention. Moreover, if geopolitical tension worsens, we could see market participants rotate out of USD and choose JPY as their haven choice after crowding into the greenback.

On the chart, the pair is extending choppy trade around the 159.00 level following bounce from the 157.50 low of last week. Negative daily studies suggest consolidation giving way to renewed selling pressure later. Break of the 158.00 level and 157.50 low will open up room for deeper pullback to retrace strong gains from the 152.27, February low. Lower will see room to support at 157.00 congestion then the 156.45/00 area. Meanwhile, resistance at the 159.45/90 high expected to cap. Clearance here, if seen, will turn focus to the 161.00 level then the 161.95, July 2024 multi-year high.

Figure: Underlying CPI Inflation Actually Well Behaved

While no change in policy is expected from the Norges Bank’s verdict due on Mar 26, a clear shift in rhetoric is almost inevitable.  It may very well drop its recently repeated assertion that ‘the policy rate will be reduced further in the course of the coming year’.  The question is whether it will suggest that the next policy move may be in either direction or even suggest a hike is now more likely, though being deliberately vague as to any possible timeframe.  Such vagueness would be understandable but any clear warning of hiking would be premature to say the least – NB the softening in house prices now emerging is very probably a reaction by households to the reining in of rate cut expectations in recent months, ie prior to the outbreak of the war in Iran.

Regardless with underlying inflation dynamics being far from unfriendly (Figure 1) and seemingly downside economy risks materialising, we still think that the Norges Bank has already been far too cautious as its existing plans point to keeping policy very restrictive through the projected timeframe out to 2028, ie the policy rate stays above 3%.  For some time, we have argued that Norges Bank’s fixation with apparently resilient inflation was overdone, resulting in overly cautious policy-making, the latter also fixated by the exchange rate.  This inflation caution has intensified of late both by what have been some upside CPI surprises and of course by the likely impact of the Middle East conflict.