With so much event risk looming – it’s month-end too – an escalation in Middle East tensions could not have come at a more sensitive time for markets. World stocks, the S&P 500, Nasdaq and U.S. Treasury yields all slid on Tuesday.
The dollar on Tuesday hit a three-week high on an index basis, nudged above 155.00 yen, and was fixed at its strongest level since November against the Chinese yuan. But it ended U.S. trading on the defensive.
The BOJ’s policy decision is on a knife-edge, at least according to money market pricing, which indicates a 55% likelihood the BOJ will raise rates by 10 basis points. That’s down from a 60% probability earlier this week.
If the central bank stands pat and delivers a dovish message, the dollar could head back up to intervention territory around 160.00 yen. A hike and hawkish stance could bring 150.00 into view.
While policymakers are expected to outline plans to taper the bank’s huge bond-buying stimulus, a rate cut is a close call. They may wait and see what the Fed does later on Wednesday, making a move in September more likely.
While the Bank of Japan deliberates how it will tighten policy, the People’s Bank of China is going the other way, and PMIs from Beijing on Wednesday will give the first glimpse of how the world’s second largest economy performed in July.
