The FX and macro landscapes are locked in a tense, multi-front waiting game. Between a shifting guard at the US Federal Reserve, a high-stakes military and diplomatic standoff in the Middle East, and defensive manoeuvres from Asian central banks, the macro picture is highly synchronized right now. The on-again, off-again expectations of a US-Iran deal regarding the Strait of Hormuz remain the primary swing factor for global inflation and global bond yields. For all the rhetoric surrounding American energy independence, oil prices dictate the direction of US Treasury yields. High yields are already capping the equity market. If negotiations break down and push oil prices higher, the resulting spike at the pump acts as an immediate, regressive consumer tax.
Next week’s US data releases are critical. If the US Conference Board’s Consumer Confidence Index dips amid high pump prices while the PCE Deflator comes in hot, it will solidify market fears of a stagflation trap, providing a very tough backdrop for the Trump administration ahead of the US midterms. Today's White House swearing-in of Kevin Warsh as Fed Chair is steeped in historical irony. The market is acutely aware that the last time a Fed Chair was sworn in directly at the White House rather than at the Fed was August 1987, when Alan Greenspan took office. Black Monday followed just two months later.
Across Asia, countries most vulnerable to surging energy costs and supply disruptions have transitioned from passive monitoring to active and aggressive defences to insulate their economies.
Japan has deployed heavy, direct physical interventions to aggressively pull USD/JPY lower from the significant 160 level, signalling that the line in the sand is being fiercely defended. US Treasury Secretary Scott Bessent lent some verbal support to the currency's defence; markets see him backing a Bank of Japan rate hike in June. However, Prime Minister Sanae Takaichi’s plan to compile a supplementary budget has sent long-term JGB yields surging to multi-decade highs, creating a direct friction point between stabilizing the currency and managing sovereign debt costs. In the Philippines, the Bangko Sentral ng Pilipinas (BSP) has chosen not to rely solely on currency smoothing. The BSP proactively hiked rates by 25 bps to 4.50% in April to anchor inflation expectations while matching its regional peers with FX interventions to cap USD/PHP at 61.75 this month, buffering the currency against imported energy shocks.
Bank Indonesia delivered the most dramatic defensive move of the month after the IDR plummeted to a historic low of 17,748 per USD. In a surprise move on May 21, BI shocked markets with a jumbo 50-bps rate hike to 5.25% to counter the recent rise in US bond yields. These moves in Jakarta have markets now aggressively betting that the Reserve Bank of India will follow a similar playbook at the June 5 meeting to address the INR’s depreciation past 95 per USD. In the end, these Asian currencies still need to see oil prices cool with the Middle East situation and lower US bond yields.
Quote of the Day
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Jonathan Swift
May 22 in history
Ceylon adopted a new constitution, becoming a republic and changing its name to Sri Lanka in 1972.
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