Asia wrap: Awaiting Israel's next move as USD/JPY eyes 150.00?

Global traders are laser-focused on hedging tail risks right now, and the primary concern is the potential for higher oil prices. The ripple effects of soaring oil can shake up risk sentiment and FX markets across the board. Luckily, the most straightforward hedge is simply buying U.S. dollars. With the greenback acting as the global safe haven and the go-to currency when uncertainty spikes, it’s a clean play for insulating against the storm that could hit if oil prices surge further.

Markets are in a state of suspense, bracing for Israel's anticipated retaliation against Iran—a move that could catapult oil prices skyward. Brent crude has settled around $75/bbl for now, but any military strike, particularly one targeting Iran’s oil or nuclear infrastructure, could trigger a significant spike. The U.S. is reportedly working behind the scenes to prevent this escalation, knowing full well that such a strike could ignite a much broader conflict. Traders are watching every headline closely, knowing the situation could change in an instant.

At the same time, the U.S. dollar is riding high, fueled by robust economic data overnight. The stronger-than-expected ADP employment report only bolstered the newfound confidence among dollar bulls as the greenback flexes its muscles. Unless there’s a significant downside shock in upcoming economic numbers, the dollar could keep benefiting from catching up to the hawkish repricing of the Fed curve, Realining with the Fed's steady 25bp-per-meeting guidance. For now, the dollar is firmly in the driver’s seat, but surprises are always around the corner in this market.

On the yen front, it's been a wild ride. USD/JPY surged by 4 big figures, strengthening the dollar index. This came after Japan's new Prime Minister, Shigeru Ishiba, stated that the economy isn't ready for more interest rate hikes, a dovish nod echoed by BoJ Governor Ueda, who voiced concerns about the uncertain global outlook and unstable financial markets. This dovish tone has kept the yen under pressure, though some selling emerged post-Tokyo Fix. However, with markets pricing out any BoJ tightening this year, further significant yen weakness would likely need to be fueled by a more hawkish shift in U.S. rate expectations or a renewed appetite for carry trades.

With Powell leaning hawkish and Ueda delivering relatively dovish signals, the stars seem aligned for USD/JPY to push toward 150, especially if Friday’s NFP comes in strong. Right now, the calculus points in that direction. 

As for safe-haven demand, while the dollar seems to be the go-to in geopolitical stress, the yen's vulnerability is tied to oil prices. Higher oil costs create headwinds for energy-importing nations like Japan. So, when the Middle East heats up, I prefer to look elsewhere for shelter because the yen, counterintuitively, can find itself under pressure or at least not performing as well as other safe havens. Indeed, with a 7% jump in crude oil prices and with Japan as a large energy importer, this development is yen-bearish. Fears of a renewed global inflation shock on an escalation of the conflict are also yen bearish.

In short, tensions are simmering, and so are oil prices. Traders are on high alert, waiting for Israel's next move, and the dollar's fate is tied to how the U.S. data and Fed messaging stack up against the unfolding geopolitical drama.