Overall markets seem to be trying to trade towards mean reversion with the announcement of the US-Iran deal, even as uncertainty remains around the details of the negotiations and the path around reopening. While the US Dollar saw some recovery through the London trading session, the bigger moves were in currencies including in Asia which have been beaten down such as INR, PHP and IDR, as markets try to look forward to lower oil prices over time. Of course, whether this can sustain will depend on how negotiations pan out, and also on the various actors including whether Israel plays ball on Lebanon.
The big theme in markets is also the bonanza of central bank meetings this week, and the Bank of Japan and the Reserve Bank of Australia will start the ball rolling on that front today. We expect the BOJ to hike rates and RBA to keep rates on hold, but the key for markets will be tone of the press conference for both.
On the Bank of Japan specifically, this meeting is slightly more tricky given that Governor Ueda will not be around and Deputy Governor Uchida will front the press conference. We think the BOJ will hike rates, and on paper the messaging will focus on the upside risks to inflation, and as such continue to signal BOJ’s intention to continue policy normalization. Nonetheless, the perception and interpretation of the Deputy Governor’s remarks may also matter and the Japanese Yen will also take its cue on how forcefully he communicates on the path of rates ahead.
For the Reserve Bank of Australia, with RBA one of the earlier ones to hike rates given its starting point of stickier inflation and greater capacity constraints entering into the Iran conflict, it is likely closer to the end of hikes rather than the beginning. Nonetheless, Governor Bullock may want to keep the possibility alive for now, but we think any signs and signals that RBA is at the end of the road on this front could open some room for AUD downside. Given how much AUD/NZD has already run higher over time, a mean reversion trade for shorting AUD/NZD over time could look quite attractive.
Looking ahead to the rest of this week, the key will be the Fed and in particular which version of Kevin Warsh may stand up to reveal himself to markets – is it the AI productivity Warsh, is it the Fed balance sheet Warsh, or is it the hawkish Warsh during Ben Bernanke’s time, or perhaps a combination of all. The sense from markets is that he will likely provide far less forward guidance and in particular also not provide dots in the Fed’s dot plots. With Warsh also interestingly invoking Alan Greenspan in his acceptance speech, what is clear is that he may attempt to reshape the Fed in some fundamental ways over time, even as the FOMC more broadly looks increasingly divided now in their collective views.