Ahead Today
G3: US initial jobless claims, new home sales; ECB and BOJ policy decisions; Japan industrial production
Asia: Malaysia CPI and trade, CBC policy decision, Philippine BOP
Market Highlights
Energy prices stay elevated as the US–Israel–Iran conflict escalates following Israel’s attack on Iran’s gas field. Iran has retaliated, reportedly causing extensive damage to Qatar’s LNG facility. Control of the Strait of Hormuz also remains critical for oil and gas price dynamics, but President Trump’s efforts to rally allies to help secure the waterway have so far seen limited traction.
On US rates, the Fed kept policy settings unchanged, while the latest dot plot points to 1 rate cut this year. The policy outlook has become more complex, with Fed Chair Powell citing uncertainty due to the US-Iran war. Rising upside inflation risks from higher energy prices are colliding with signs of labour market softening, reinforcing a cautious near-term stance. However, a sustained oil shock, such as a USD150/bbl scenario, could push US inflation sharply higher towards ~5%, which may elicit an insurance rate hike. Against the current risk-off backdrop, the US dollar stays supported.
Markets will now turn their attention to the Bank of Japan policy meeting. We expect rates to remain on hold today, but inflation risks from higher energy prices and a weaker yen - both of which would add to imported inflation - could tilt the balance toward a hawkish shift. Notably, Japan is highly dependent on the Middle East for its crude oil imports.
Regional FX
Escalation in the Middle East conflict, with energy infrastructure increasingly targeted in tit-for-tat attacks, is likely to keep regional sentiment cautious in the near term. Policymakers in India and Indonesia have been intervening to contain the pace of currency depreciation, with foreign reserves likely to show declines. Across Asia, economies such as Thailand, India, and the Philippines, where food carries a relatively high weight in CPI baskets, are also particularly vulnerable to second-round inflation pressures, as higher energy costs are likely to spill over into food prices.
Against this uncertain global backdrop, we remain relatively constructive on the ringgit. Malaysia’s domestic macro fundamentals remain supportive for now, with steady growth, contained inflation and Bank Negara Malaysia on hold. Malaysia’s status as a net energy exporter also makes the ringgit more resilient than regional peers amid elevated energy prices, while CNY strength continues to provide an important anchor. A potential boost to the petroleum-related revenues should allow the government to sustain RON95 fuel subsidies, helping to keep domestic inflation relatively contained and reinforcing the case for a prolonged BNM rate hold.