Sunrise Market Commentary – ActionForex

Markets

The Bank of Japan lifted its policy rate as widely expected from 0.75% to 1.0%, the highest level since 1995. The board voted 7-1 in favor, with board member Asada, appointed by Prime Minister Takaichi, supporting the status quo. Governor Ueda is hospitalized and did not cast a vote. The policy statement highlighted that the BoJ will continue to raise the policy rate and adjust the degree of monetary accommodation given that underlying CPI has been approaching 2% and financial conditions have been accommodative. The latter is a tweak from the April statement, which still mentioned significantly low real interest rates, and suggests the central bank may be approaching more neutral policy settings. When it comes to inflation, labor shortages continue to be strong, supporting the virtuous dynamic between wages and prices and resulting in rising medium- to long-term inflation expectations. Underlying CPI is expected to hit the 2% price stability target between the second half of fiscal 2026 and fiscal 2027 and remain around that level thereafter. Companies are also seen passing on higher energy costs at a relatively fast pace. Apart from the interest rate decision, the BoJ announced that it will reduce the planned amount of its monthly JGB purchases by about JPY 200 billion each calendar quarter until January-March 2027. From April 2027, monthly JGB purchases will be around JPY 2 trillion. The Japanese yield curve is bear steepening this morning, with yields rising by as much as 9.4bps at the 15-year tenor. The Japanese yen is going nowhere and remains stuck above the USD/JPY 160 threshold that prompted FX intervention at the end of April. Japanese money markets see the next rate hike, with an 84% probability, by the December meeting.

Brent crude continues to trade near the USD 83/bbl area where it started the week in response to news that the US and Iran will sign an interim deal in Geneva on Friday. Apart from ongoing bullishness in equity markets, fixed income and FX markets are treating the development cautiously as the devil may be in the details. EUR/USD is back below 1.1600. The 60-day ceasefire extension intended to facilitate a nuclear agreement appears rather tight, while it will also take time for oil flows through Hormuz to normalize. From a risk perspective, the balance has shifted from continued “hope for a deal” to “fear that the deal could derail”. Today’s economic calendar contains second-tier data such as Germany’s ZEW investor confidence survey as markets count down to Kevin Warsh’s first meeting as Fed Chair.

News & Views

The Reserve Bank of Australia (RBA) kept its policy rate unchanged at 4.35%. The decision follows 25bps rate hikes at the first three meetings of 2026 as capacity pressures pushed inflation higher. Recent data indicate that inflation remains too high, with some firms experiencing cost pressures from higher energy prices and other commodities and passing these costs on through higher prices for goods and services. At the same time, financial conditions have tightened in response to previous rate hikes, with the RBA seeing signs that consumer spending growth is slowing and that housing market momentum has shifted toward price declines in some capital cities. The central bank also noted a somewhat higher-than-expected unemployment rate. The RBA remains focused on ensuring that inflation does not become embedded through the pass-through of higher oil prices. To achieve this, demand growth needs to slow to reduce capacity pressures and bring inflation back to target. The Bank reiterated that policy is well positioned to respond to future developments, including raising rates again if necessary. After trading around 4bps higher ahead of the decision, the Australian 3-year yield eased afterward and is currently little changed near 4.43%. The Australian dollar also softened modestly toward AUD/USD 0.7050.

A series of Chinese economic releases published this morning showed a mixed and increasingly divergent picture of the Chinese economy. Retail sales unexpectedly declined by 0.6% y/y in May, with year-to-date growth slowing to 1.4%, suggesting continued weakness in domestic demand. Fixed asset investment contracted further to -4.1% y/y year-to-date from -1.6% previously, while property investment also deteriorated further to -16.2% year-to-date. Some weather-related disruptions may have contributed to the weakness in demand indicators. Both new home prices (-0.2%) and existing home prices (-0.26%) continued to decline on a monthly basis. The unemployment rate eased slightly from 5.2% to 5.1%. On the other hand, the supply side of the economy continues to perform better. Industrial production rose 4.5% y/y in May from 4.1% previously, indicating that exports and AI-related industries continue to support activity even as domestic demand struggles to regain momentum. After touching its strongest level since February 2023 yesterday, the yuan eased marginally this morning, with USD/CNY trading around 6.761.