Ahead Today
G3: US Fed’s Goolsbee speaks, Chicago Fed National Activity
Asia: India core industries output
Market Highlights
The key focus of markets continues to be on USD/JPY post the Bank of Japan policy meeting, coupled with reported signs by news outlets that BOJ conducted a rate check during New York session perhaps indicating some discomfort on USD/JPY moving sharply higher. In particular, while the Bank of Japan hiked rates by 25bps to 1.25% in its policy meeting and as such also increasing the pace of rate hikes, markets took the meeting to be somewhat more dovish for a few reasons. First, there wasn’t too much in the statement which could have pointed to a faster acceleration of rate hikes, with similar description of the economy as previous statements. Second, the vote for the decision was 7-2 including two dissents with board members Toichiro Asada and Ayano Sato – Prime Minister Sanae Takaichi’s administration’s BOJ board appointees - dissenting in favour of a hold. Third, while there was some speculation that more hawkish members of the board such as Takata and Tamura might vote for a larger 50bps hike, this was not the case although both did dissent against the description of inflation in the statement. Last but not least, BOJ Governor Ueda did not sound more hawkish and placed a low probability of back-to-back rate hikes.
We as such saw USD/JPY move higher from 156 handle up to as high as above 158 after the BOJ meeting.
In markets, what’s important is not just the actual decision but how markets were priced heading into it. On that front there was already quite a lot in the price with short-term rates markets pricing in slightly less than 3 more hikes at 1.9% by July 2027 ahead of the meeting. Options markets were also bid for the downside for USD/JPY with risk-reversals generally still negative, while latest positioning data suggest net-long overall in the markets.
What’s also interesting are news reports that the Bank of Japan seems to have conducted a rate check during the New York session, and ahead of the 3-day holiday period where liquidity for USD/JPY is likely to be lower. This pushed USD/JPY down from 158 to below 157, and markets will be watching closely to see if there are any further intervention risks.
Looking ahead to the rest of the week, the focus in Asia will be on the Trump-Xi Summit on 24 September. The initial signs are reasonably positive amidst generally low expectations, with US Treasury Secretary Scott Bessent and China’s Vice Premier He Lifeng meeting together with key members such as US Trade Representative Jamieson Greer and China’s international trade negotiator Li Chenggang. The discussions centered around trade, investment, the Iran war, and in some signs that there might be increasing collaboration to address the risks from AI a possible US-China AI dialog.