Trump calmed bond markets overnight by signalling that talks with Iran are “in final stages”, leading to a slippage in US yields and a fall in the DXY towards 99. However, a deal is by no means certain, with Trump also having threatened “a big hit” on Iran if there is no deal. Strategically, little can be achieved for the US with more military strikes, while retaliation from Iran will create havoc on energy markets. Thus, the fragile ceasefire equilibrium may still hold even if talks fizzle out. Markets will instead watch increasing energy tanker transits through the Strait of Hormuz, with Tehran having created the Persian Gulf Strait Authority (PGSA) this week to manage passage. If transits are to pick up durably, this could help alleviate short-term energy supply strains and stabilize oil prices around USD100.
USD/JPY is consolidating around 159, with markets wary of intervention and holding back from testing 160. The interim respite in oil prices and slippage in US yields should support the JPY today, but markets are also wary of a possible supplementary budget by PM Takaichi that could weigh on confidence. Meanwhile, Japan’s April trade numbers today are as strong as its East Asian neighbours, with exports growing 14.8% y/y (Mar:11.5%) on the back of strong demand for chips. Imports growth eased on lower oil purchases from the Middle East, leading to a larger than expected trade surplus. By and large, external demand has turned out exceptionally strong despite the US-Iran conflict. This could give BOJ the confidence to hike in June, which should lift the JPY if there are no fiscal mishaps.
USD/IDR is likely to stabilize after BI delivered a larger than expected 50bps hike yesterday. Policy adjustments should continue to be made in response to fiscal concerns amid elevated oil prices. A hike in subsidized fuel prices, if enacted, could further shore up IDR sentiment. Indonesia has cut back its allocation to free school meals from IDR 335trn to IDR 268trn, and President Prabowo had also promised in a social media video recently to “put things in order” for the program amid problems over execution.
Quote of the Day
“There's more to life than being a passenger.”
Amelia Earhart
May 21 in history
Amelia Earhart landed near Londonderry, Northern Ireland, completing the first solo transatlantic flight by a woman in 1932.
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