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[MARKET ANALYSIS] DXY continues to benefit from geopols, JPY bucks the G10 trend and holds onto gains

The DXY's firmness this morning reflects the ongoing geopolitical tensions, particularly in Iran, which are supporting higher energy prices and pushing USD strength.

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[MARKET ANALYSIS] DXY continues to benefit from geopols, JPY bucks the G10 trend and holds onto gains

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  • DXY is slightly firmer this morning and trades within a 99.31-99.52 range, and now heading back to the YTD high at 99.69 (March 9th). Upside on Wednesday was facilitated by higher yields as the energy prices continue to trudge higher as the geopolitical situation in Iran is showing little signs of abating any time soon, as an overnight attack on Omani export terminals led Brent back above USD 100/bbl. The recent IEA 400mln barrel reserve release has ultimately had little impact on prices, given the lengthy timeline for the barrels to enter the market and ING rightly points out, it still works out to be “far short of the supply losses we are seeing from the Persian Gulf”.
  • Domestically, focus will be on Weekly US initial jobless claims, which are expected to be little changed at 213k (from 215k prior), and continuing claims are seen at 1.85mln (from 1.868mln). The US will release January trade data, where the trade deficit is expected to narrow to USD 66.6bln (from USD 70.3bln). Fed’s Bowman (voter, dove; text and Q&A expected) will discuss bank capital rules, but will not touch on monpol or the economic outlook ahead of the FOMC meeting next week.
  • G10s are broadly flat to lower against the USD. The JPY and CAD hold afloat, though the former remains within the touted intervention zone beyond 158.00. As mentioned in previous FX pieces, intervention seems unlikely given, a) intervention would prove to be ineffective given the current geopolitical environment, b) low volume short positions on the JPY,  c) the move is fundamentally driven by higher energy prices d) the recent lack of verbal intervention suggests potentially higher bar for USD/JPY to rise. Nonetheless, markets will be cognizant of any jawboning heading into the BoJ meeting and wage negations next week.
  • AUD underperforms vs USD this morning, scaling back some of this week’s gains. RBA hike bets continue to be taken by sell-side banks, with ANZ the latest see a 25bps increase at next week’s meeting; money markets now assign a circa 80% chance of such a move.
Context

While the JPY remains resilient compared to other G10 currencies, it still trades near potential intervention levels, making it vulnerable if geopolitical conditions worsen. This dynamic indicates that traders should watch for any shifts in sentiment or policy from central banks, particularly ahead of the upcoming BoJ meeting.

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