Asian equities are expected to experience a downturn following a shift to a risk-averse stance on Wall Street, where global stocks and bonds witnessed a substantial sell-off. The heightened negative price action stems largely from the introduction of new US bank capital proposals that appear to influence the financial viability of the largest US lenders. This development will likely reverberate through the Asian banking sector, where liquidity and credit conditions could be adversely affected. Furthermore, additional selling pressure emerged in response to reports from the Japanese media suggesting that the Bank of Japan is contemplating an expansion of its yield curve cap band ahead of its meeting today. This development prompted a surge in demand for the JPY, which in turn exerted downward pressure on all major foreign exchange pairs and core equity indexes alike.
This situation is set to remain a central driver for the entire trading session. Any announcement either refuting or confirming the Bank of Japan’s action will significantly influence the broader market, given its acute sensitivity to fluctuations in the JPY and Japanese bonds. Market participants had initially anticipated the Bank of Japan to maintain its current policy settings, including interest rates at -0.1% and a +/- 50bps target band for 10-year yields.
Moreover, it is expected that the central bank might elevate the inflation forecast to a maximum of 2.5% for fiscal year 2023, a move that could potentially set the stage for future policy normalization. This change could amplify the volatility of the USDJPY contract, transforming it into a prime indicator of market risk in today’s trading session. Additionally, traders will keenly monitor the recent US Personal Consumption Expenditures Price Index and the US Employment Cost Index. This vigilance aims to understand the implications of the recent FOMC decision and pricing the forthcoming meetings, considering the ongoing speculation about another interest rate hike by December this year.
