Asia Day Ahead: BoJ meeting as key risk event ahead
Attention this week has been centred around Trump’s policies and it seems that markets are able to get through it with relative calm, at least for now.
Asia Open
The Asian session looks towards a sea in green in today’s session, with the Nikkei +0.42%, ASX +0.40% and KOSPI +1.0% at the time of writing. Attention this week has been centred around Trump’s policies and it seems that markets are able to get through it with relative calm, at least for now.
His statements, rather than unsettling sentiments, seems to spark more optimism with talks of massive artificial intelligence (AI) investments, a dovish stance on interest rates and intent to manage inflation risks with lower oil prices. That paved the way for buyers to extend their interest towards risks overnight, with the S&P 500 pushing to a new record high while the more value-focused DJIA added more than 400 points.
US dollar consolidates further
The US dollar remains stuck in a near-term range following its post-inauguration dip, where there may be further downward pressures, given that we are coming off the back of extreme long US dollar positioning built up over the past months. While any tariff talks could see the US dollar react positively, expectations have been anchored by Trump’s comments thus far and a less severe-than-anticipated implementation of tariffs could still leave room for further unwinding.
For now, its daily relative strength index (RSI) has dipped below its midline for the first time since October 2024, which still leaves bearish bias in place. Further retracement may leave the 106.40-106.88 level on watch next.
Eyes on Bank of Japan (BoJ)’s meeting ahead
The BoJ meeting ahead will be the key risk event for markets to navigate this week, with memories of the August 2024 market turmoil—triggered by the BoJ’s surprise rate hike—likely still fresh on investors’ minds. However, rate expectations appear more grounded this time, coming off the back of policymakers’ communications over the past weeks. A 25 basis point (bp) hike is widely anticipated, shifting the focus to the policy outlook. Should the BoJ act today, markets currently expect just one additional 25 bp hike for the remainder of the year.
Confidence in Japan’s inflation and wage growth dynamics has undoubtedly strengthened, but the key question is whether policymakers will signal a stronger commitment to further hikes today. Given that markets are only expecting further rate move in the second half of this year, a hawkish tone could prompt markets to recalibrate rate expectations toward an earlier timeline. Alternatively, a data-dependent stance might be perceived as dovish, which could bring less of a surprise and hence, less volatility for markets.
Make-or-break moment for the Nikkei 225
The BoJ meeting will likely be a make-or-break moment for the Nikkei, with the index currently back to retest a critical horizontal resistance at the 40,220 level—a barrier it has failed to break on at least five previous attempts. The key determinant will hinge on the BoJ’s tone regarding future rate hikes. A signal of patience in further tightening could boost Japanese equities, potentially driving the Nikkei higher.
A decisive close above the 40,220 level would signal a breakout from a months-long consolidation range, suggesting stronger buyer momentum. This could set the stage for the index to target its July 2024 high at the 42,500 level as the next key resistance.
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