Ahead Today
G3: Bank of Japan policy meeting
Asia: Malaysia CPI, Malaysia trade, Thailand FX Reserves
Market Highlights
Oil prices fell, risk assets rallied, while global duration did better after enduring a meaningful sell-off over the past few weeks. Part of this was driven by some easing of oil supply concerns as the markets looked forward the next round of diplomacy that will shape the US-Iran war. Saudi Araba in particular has moved to restore the damaged East-West pipeline to its Red Sea coast, aiming to return about half its capacity within days. At the same time, some tankers continue to traverse the contested Strait of Hormuz. President Donald Trump told Axios he was approaching a “big decision” on whether to re-escalate attacks on Tehran, with a meeting with Gulf nations planned for next week on the sidelines of the UN General Assembly, while Trump is also due to hold a summit with China’s President Xi Jinping that may touch upon the war. Reuters also reported that Beijing privately asked Iran to help rein in Houthi militants after an appeal to China by Riyadh, with the militant group making advances in Yemen towards the Bab el-Mandeb chokepoint in recent days.
The big focus in markets today will certainly be on the Bank of Japan policy meeting. With JPY front end rates markets already fully pricing in a 25bps rate hike in today’s meeting, together with slightly more than 3 hikes by June 2027, the bar to a hawkish surprise by the Bank of Japan might seem quite high at this point in time. The key as such for markets is not just whether BOJ hikes, but also how it hikes and the communication by Governor Ueda on the path moving forward. Votes by various BOJ Board Members could be important, and this would include whether we get a vote for a 50bps hike by more hawkish members such as Takata or Tamura. On the other side, members who are deemed more dovish and appointees by the Takaichi administration such as Asada and Sato will also be looked at closely, and in particular the latter as the markets do not yet have a full picture of how she would think and vote right now. Meanwhile, while Bank of Japan is unlikely to commit to any pre-ordained neutral rate over the medium-term, any comments by Governor Ueda hinting that the next (and every) meeting is live indicating a possibility of back-to-back rate hikes may be taken by markets as a more meaningful than expected hawkish shift. All-in, although the bar is quite high given the existing pricing by markets, given how US rates have already shifted higher, how oil prices are already quite elevated, and the short-term adjustment higher in USD/JPY, we may get quite a big move in the FX pair during this BOJ meeting.