Ahead Today
G3: US CPI, University of Michigan sentiment, durable goods orders, factory orders; Germany CPI
Asia: Bank of Korea policy decision, Taiwan trade, Thailand international reserves, China PPI
Market Highlights
Markets are rallying on ceasefire headlines and the hope that the US–Iran war is ending, but the price action is running well ahead of the fundamentals.
While the announcement of a two-week US–Iran ceasefire has provided short-term relief to Asia FX, the reprieve looks fragile. The ceasefire does not appear to cover Lebanon, and Israel’s subsequent strike on Lebanon has raised concerns about the durability of the ceasefire agreement. More tellingly, tanker traffic through the Strait of Hormuz remains subdued, and war-risk insurance premia are likely to stay elevated, even under a ceasefire. These factors suggest that oil prices now have a structural floor, rather than meaningful downside. As such, the recent bounce in Asia FX appears largely sentiment-driven and vulnerable to reversal should geopolitical tensions re-escalate or if oil prices stay high for longer.
US 2-year yield remains elevated. With February PCE already sticky at 2.8%yoy, and higher US gasoline prices likely lifting inflation from March onwards, the balance of risks is skewed toward delayed Fed easing. This is consistent with the March FOMC minutes, where several policymakers flagged heightened inflation risks, effectively reinforcing a floor under US Treasury yields and the US dollar.
For Asia FX to move from a relief-driven bounce to more sustained recovery, several conditions would likely need to be met. First, there must be a reopening of the Strait of Hormuz, with tanker volumes normalizing. Second, oil prices would need to decline sustainably, reducing the inflation effect that is currently feeding into higher US yields and underpinning the US dollar. Third, the Fed would need to re-anchor toward policy easing. At this stage, none of these conditions have been sufficiently fulfilled. This argues for fading ceasefire-driven strength in Asia FX, particularly in oil-sensitive currencies such as INR, PHP, and THB. However, CNY strength continues to provide a stabilizing anchor for the region, underpinned by China’s sizeable strategic reserves, while Singapore’s deep energy infrastructure, diversified energy sourcing, and ample fiscal buffers could keep SGD relatively resilient below the 1.3100 level against USD.