FX Daily Strategy: Asia, March 5th

Figure: Brent Oil Prices (USD)

The jump in oil and gas prices has so far been modest, despite the effective closure of the straits of Hormuz by Iran.  Part of this is OPEC+ immediate increase of 200k barrels per day signalling that further supply could be added if the war drags on.  However, the modest reaction also reflects anticipation that the war will likely be short, with the U.S. and Israel attacking many military targets in Iran.  Though Iran is attacking U.S. military bases and civilian targets throughout the region, financial markets appear to be anticipating that this will be subdued by U.S. and Israel military forces in the next few days and potentially defensive activity by gulf nations.    

While financial markets had feared a limited U.S. attack to soften up Iran nuclear negotiations, statements from President Trump and others suggests that regime change is on the agenda.  The immediate focus is on the appointment of a new Supreme leader in the next couple of days and whether that led to a ceasefire and negotiations with the U.S..  Trump hinted at this off ramp on Sunday evening.  However, this could led to a ceasefire but may not led to a lasting settlement, if the U.S./Israel demands are too far reaching e.g. free elections.  The Iranian military do not want a path towards free elections and could prefer to seize power and change decision making in Iran between the clerics and the military that would still leave an autocratic government.  This could leave Israel and the U.S. either continuing military activity for weeks or threatening to restart hostilities.

USD flows remain critical as we head to the end of week. The FX market has been dominated by USD movement as haven bids have captured headlines and market participant's heart. This classic flight to safety will likely to continue for the U.S.-Iran situation is unlikely seeing a swift end. The next trigger could be further disruption at Strait of Hormuz, "scorch earth" style attack on Middle East countries oil facilities or direct attack on American soil, could trigger inflow towards thegreenback.

On the chart, cautious trade has given way to fresh gains, as intraday studies continue to rise, with prices currently pressuring resistance at congestion around 99.00 and the 99.25 Fibonacci retracement. Daily readings are positive and broader weekly charts are rising, highlighting room for a break and continuation of late-January gains towards the 99.50 current year high of 15 January. However, already overbought intraday and daily stochastics could limit any initial tests in consolidation, before gains extend still further. Meanwhile, support is raised to congestion around 98.50. An unexpected close beneath here will help to stabilise price action and prompt consolidation above further congestion around 98.00.

Such haven bids may benefit the JPY also. Despite USD is gaining the upper hand in being the favorable haven asset, JPY is a close second. The somewhat calmer trades in JGB market indicates market participants' confidence in the fiscal health has been partially restored. The speculative shorts in JPY should be diminishing. If the contagion of risk aversion flows through to U.S. equities further, it could lead to inflows/reversal in the JPY.

On the chart, the pair retests the 157.90/158.00 resistance has given way to consolidation as prices unwind overbought intraday studies. Daily chart are stretched as well and suggest consolidation likely to extend though a later break cannot be ruled out. Clearance, will return focus to the 159.23 and 159.45, January highs. Meanwhile, support remains at the 157.00/156.00 congestion area which should underpin. Would take break here to fade the upside pressure and open up room for deeper pullback to retrace gains from 152.27/10, February/January lows.