Asia FX: Ceasefire bounce faces oil and Fed headwinds – MUFG

MUFG’s Senior Currency Analyst Lloyd Chan argues that Asia FX gains on ceasefire hopes are running ahead of fundamentals, as Oil retains a structural floor and US yields stay elevated. He highlights that tanker traffic through the Strait of Hormuz remains subdued and war-risk premia high, reinforcing US Dollar strength and suggesting Asia FX relief rallies are vulnerable to reversal.

Relief rally seen as fragile and temporary

"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."

"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."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)