Markets are paring back risk trades after the US and Iran exchanged fire in the Strait of Hormuz, amid the start of US efforts to guide ships through the strait. Any doubts on the willingness of Iran to forcefully assert control over the strait are now dispelled, but the Iranian response is also controlled, with attacks focussed on vessels transiting the strait, and strikes limited to the UAE to warn against furthering its alliance with Israel. The fragile “ceasefire” may hold in name for reasons of expedience, particularly with US-Iran negotiations still on-going and escorted transits still happening, albeit not unchallenged. Given the geopolitical risks, 1M Brent has risen over 6% towards USD115, which could add further pressures to Asian importers’ currencies, including INR, IDR, and THB.
Japan is intervening in markets to support the JPY, with a second consecutive intervention yesterday that pushes USD/JPY down to mid-155 levels. The abrupt fall in USD/JPY from above 160 has come after Vice Minister Mimura issued an explicit “final warning” last Thursday. Officials may have judged it advantageous for interventions this week amid Japanese holidays and lower liquidity, but an unexpected jump in oil prices has rendered intervention effects to be less impactful. USD/JPY has quickly rebounded back to its pre-intervention level of 157, and officials could continue intervention again today until there is a durable JPY recovery to protect credibility. A Japanese Finance Ministry official has reportedly cited an IMF rule that three days of intervention count as a single operation and is still consistent with a free-floating exchange rate regime.
AUD/USD is consolidating around mid-0.71 levels, with RBA expected to hike rates for a third consecutive time today to 4.35%. Markets will watch RBA’s guidance for further rate hikes, with inflation risks amplified by rising energy prices. AUD also stands out as a beneficiary of rising commodity prices, with Australia being a large resources exporter, and one of the world’s top LNG exporters.
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