Ahead Today
G3: Speech from Fed’s Bowman and Waller
Asia: China loan prime rates, Thailand international reserves, Taiwan export orders
Market Highlights
Markets are increasingly pricing in inflation risks amid the energy price shock, pushing US yields higher, which has reinforced near-term US dollar support. However, this dynamic may be unsustainable over time: US yields at these levels raise US debt-servicing costs materially, especially with US national debt having gone past US$39 trillion. US debt will be rolled over at higher interest rates, which could raise further concerns about the US fiscal outlook.
Meanwhile, in Japan, the BOJ kept its policy rate unchanged at 0.75% in an 8–1 vote, with BOJ’s Takata dissenting in favour of a hike to 1%. The policy statement highlighted rising inflation risks from higher oil prices. However, Governor Ueda suggested that any growth drag from Middle East turmoil would likely be temporary, which may imply that an April rate hike could still be an option, amid the inflationary impact of the ongoing energy shock and a weaker yen – which adds to imported inflation. Markets continue to price in around 2 BOJ hikes over the next 1 year.
Regional FX
The burden of higher energy prices is falling disproportionately on Asia, reflecting the region’s heavy dependence on Middle Eastern oil and gas supply. The widening Brent–WTI spread underscores this asymmetry, coinciding with renewed pressure on Asian FX this month. PHP and INR continue to make fresh lows against the US dollar, while USDKRW is trading at levels last seen during 2009.
For the Thai baht, the outlook remains challenging. Thailand runs one of the largest net oil and gas trade deficits in Asia, leaving it highly exposed to sustained energy price shocks, notwithstanding recent political stability with PM Anutin retaining his role. The technical backdrop also points to scope for further baht downside.
The Middle East conflict has intensified following Iran’s reported attack on Qatar’s LNG facilities, which could remove around 17% of Qatar’s LNG export capacity for several years. This represents a meaningful escalation, tightening global energy markets and keeping prices elevated. While US and Israeli efforts to reassure markets, along with Israel’s indication that it would avoid targeting Iran’s energy infrastructure, have helped limit near-term upside, oil prices remain high. Brent has moderated but continues to trade above USD100/bbl.