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Yen steadies as BoJ maintains policy
The yen regained ground after the Bank of Japan reaffirmed its cautious stance, while G7 trade diplomacy produced mixed outcomes and geopolitical risks kept investors on alert.
The Bank of Japan left rates unchanged and confirmed its slow bond taper, prompting limited yen gains.
G7 trade talks yielded incremental progress, but unresolved disputes signal fragile global diplomacy.
Risk assets remain vulnerable as geopolitical tensions and inflation uncertainty cloud Fed and SNB outlooks.
Energy markets remain on edge as Iran signals openness to talks, but no clear path to de-escalation has emerged.
BoJ holds course as yen lifts modestly
The Bank of Japan opted to keep short-term interest rates unchanged at 0.5% and left its current bond tapering plan in place through March 2026. A new schedule to reduce purchases beginning in fiscal 2026 was introduced, but its impact is seen as symbolic for now, with implementation still far off. Markets took the move in stride, resulting in a mild recovery for the yen, though expectations for long-term policy inertia persist due to weak domestic inflation and growth projections.
Policymakers acknowledged rising volatility in super-long JGB yields, highlighting concerns that yield stress could spill into broader financial conditions. Still, sluggish underlying inflation and a cautious economic outlook leave the central bank with little urgency to shift direction. The BoJ emphasized the need to monitor FX developments, signaling ongoing sensitivity to external shocks.
Trade diplomacy shows limited progress across G7
Trade talks among G7 members delivered incremental results. The US and UK managed to avert looming auto and aerospace tariffs, reaching a limited accord that preserved preferential treatment. However, critical issues such as steel and aluminum remain unresolved, with conditions tied to future security cooperation.
Meanwhile, Japan’s discussions with the US failed to yield any breakthrough. The temporary suspension of a 25% tariff on Japanese autos is set to expire in July, and without a deal, Japanese exports may soon face renewed headwinds. Canada and the US committed to finalizing a comprehensive economic and security pact within 30 days, but released no further details.
The overall picture reveals a fragmented global trade environment where countries are settling for partial wins while deeper tensions remain unaddressed.
Iran’s signal of restraint cools oil and gold surge — but not for long
News that Iran may be open to resuming nuclear talks briefly calmed oil and gold markets. However, the market reaction reflects a one-sided easing of tensions, with Israel pledging continued military strikes and former US officials calling for civilian evacuations in Tehran. As such, this is far from a full de-escalation, and risks across energy and haven assets remain tilted to the upside.
Natural gas extended gains above 5%, while oil rebounded into the $70 range for WTI and $71 for Brent. Supply remains ample in the near term, with US production at record levels and OPEC+ adding barrels. But the physical flow of energy remains precarious, and any disruption in chokepoints like the Strait of Hormuz could quickly reverse market calm.
Historical analogies suggest oil market volatility may be underestimated
Two historical episodes offer competing roadmaps. The 1973 oil embargo showed how quickly a geopolitical shock can trigger price spikes, while the 1986 Saudi-led supply glut underscored how oversupply can crash markets. Today’s dynamics show traits of both: demand remains weak, supply is climbing, and geopolitical risk is on the rise.
This dual setup raises uncertainty: a supply shock could mimic the 1970s, pushing prices sharply higher; alternatively, a breakdown in OPEC+ discipline could crash prices, mirroring the 1980s. Either path carries global macro implications, particularly for inflation and monetary policy.
Market sentiment remains too relaxed despite building risks
In currency markets, the US dollar remains under pressure, suggesting complacency about geopolitical escalation. However, this calm may be misplaced. History shows the dollar, gold, and oil tend to rally when uncertainty surges. Equity markets also reflect a mixed outlook: while the S&P 500 gained on Monday, futures slipped as Japanese yields climbed and geopolitical headlines resurfaced.
The BoJ’s decision has added pressure to global bond markets. Japanese 10-year yields are up for a third day, threatening to unwind carry trades and pushing US yields higher in tandem. This complicates the outlook for global risk assets and may limit the upside in equity indices.
Fed and SNB decisions loom as uncertainty builds
Attention now turns to this week’s major central bank decisions. The Fed begins its two-day meeting today, and while no rate change is expected, rising oil prices and trade risks may delay the easing cycle. Sticky inflation and strong labor markets give the Fed room to wait, though a dovish tone could still spur market rallies.
The Swiss National Bank is expected to cut rates to 0%, but with the franc still elevated and trade tensions unresolved, the move may not be enough to lift Swiss equities. Across the board, monetary policy remains constrained by external risks, and investor positioning appears increasingly driven by fear of missing out, rather than fundamentals.
