FX Daily Strategy: Asia, February 26th

Iran authorities appear reluctant to meet the Trump administration’s demand to stop nuclear fuel production for potential weapons.  This increases the odds of a limited attack by the U.S. on Iran to 30-40% (Figure), which could occur as soon as this weekend. The most likely Iran counterattack would once again be designed to allow a path towards de-escalation and then better negotiations.  However, modest odds exist of Iran trying to close the Strait of Hormuz, which could spike oil prices up to USD100.

If we do not have a break through in the U.S-Iran meeting but stalemate, the U.S. initial claims maybe the only data critical enough to move the greenback. Widely expected to be rising from the previous week, we are expecting no surprise form the initial claim data. Although it is likely market participants will be on the side lines until payroll and geopolitical/trade clarity, a weaker labor market may change speculation of Fed fund rates.

On the chart, there is little change as prices extend cautious trade within the 97.50 - 98.00 range. Daily stochastics are flat in overbought areas, suggesting potential for further consolidation. But the daily Tension Indicator is rising and broader weekly charts are improving, pointing to room later gains. A close above 98.00 will improve price action and open up a test of further congestion around 98.50. However, deteriorating longer-term readings should limit any tests in renewed selling interest/consolidation. Meanwhile, a close below congestion support at 97.50 would add weight to sentiment and open up a test of further congestion around 97.00.

The USD/JPY has stayed in consolidation phase for the past week. There is a lack of impetus from the Japan side as we are still waiting to hear from Takaichi about her new policies and the corresponding fiscal plans. During the silence, the next leg in JPY could be risk aversion, either driven by equity valuation changes or U.S.-Iran escalation. The long end JGB yields continue to moderate from extreme levels, indicate market confidence in Japan partially restored. The short end strength shows the expectation of more hikes to come from the BoJ.

On the chart, consolidating test of the 156.00 level but pressure remains on the upside and see scope for break here to extend Monday's bounce from the 154.00 level. Clearance will see room for extension to the 157.00 congestion then the strong resistance at 157.75/90 area which is expected to cap and give way to renewed selling pressure later. Meanwhile, support is raised to the 155.00 congestion. Would take break here to ease the upside pressure and see room for consolidation back to support at the 154.00 level.