ASIA FX: USD/THB Testing Post BoT Cut Highs, USD/IDR Above 16400

USD/CNH tracks at 7.2800 in latest dealings, very close to session highs (7.2803). This still leaves us just under the 50-day EMA (near 7.2835/40), while highs over the past week have been close to 7.3000 (which the 20-day EMA resistance point is close to). 

• CNH has dipped around 0.35% so far today, in line with broader USD index gains, although outperforming most of the G10, with yen, EUR and AUD and NZD all off by 0.50% or more.
• There is no onshore anchor point for USD/CNH, given onshore markets have started the LNY break period (returning next Wednesday).
• Broader USD gains have been fueled by fresh Trump tariff headlines, although fresh direct threats against China don't appear evident so far. Earlier remarks from Trump stated he wanted a much higher universal tariff rate than 2.5% (which according to the FT is what incoming Treasury Secretary Bessent is pushing for as an initial step on tariffs, before rising gradually).
• USD/CNH implied vols re slightly firmer, but the 1 month at 5.40%, is still comfortably sub pre-inauguration levels (above 6%). The 1 month risk reversal is also sitting off pre-inauguration highs, last slightly back from flat, at -0.21. 

• Despite the safe-haven status it enjoys, gold suffered yesterday as the USD gained as markets came to grips with the latest tariff threats, and a tech route saw a flight to the dollar.
• With President Trump threatening tariffs on steel, aluminum and copper imports, the USD gained – which typically limits the upside for gold prices.
• The tech route wiped $1trillion from the NASDAQ on fears that the US may not have the AI superiority it thinks, giving support to the USD.
• Gold fell 1% and trading today has oscillated around where bullion closed yesterday.
• Opening at US$2,740.81 gold barely moved today to trade down to $2,739.84. 

EXECUTIVE SUMMARY

• The Bank of Japan's (BoJ) recent monetary policy developments, including the 24 January decision to raise the policy rate by 25bps to 0.5%, mark a continued shift toward normalisation. This decision, though widely expected, reflected the BoJ’s growing confidence in achieving its economic outlook, supported by upward revisions to inflation forecasts and expectations of strong wage growth.
• The BoJ’s decision was not unanimous, as Toyoaki Nakamura opposed the hike, reflecting lingering caution about the economic trajectory.
• Inflation forecasts were revised upward, with core inflation expected to reach 2.7% in FY2024, 2.4% in FY2025, and 2.0% in FY2026. This outlook supports the central bank’s guidance for further rate hikes, albeit at an unhurried pace.
• Analysts have noted that despite the hawkish shift in tone, Japan’s real policy rate remains deeply negative, suggesting minimal drag on economic activity. The BoJ’s emphasis on balancing inflation control with economic growth indicates that normalisation will proceed gradually.
• In summary, the BoJ’s January decision underscores its incremental shift toward normalisation, buoyed by stronger inflation and wage growth forecasts. However, the path ahead remains uncertain, with the pace and timing of further hikes dependent on a confluence of domestic and international factors. While markets anticipate additional tightening, the BoJ's cautious stance suggests that normalisation will be measured and deliberate, ensuring that economic growth remains on track amidst evolving risks.
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