Asia FX Drifts Ahead of Warsh Test, Oil Drop Offers Boost

Markets drifted into a holding pattern ahead of the Federal Open Market Committee decision. Traders were reluctant to extend positions before new Fed Chair Kevin Warsh's first major policy test at the podium.

The Hormuz supply picture remained the key macro overhang for energy markets. Oil prices traded lower, as detailed in an earlier note on the oil drop pulling yields lower. The US-Iran interim peace deal continued to price in a gradual return of supply, though the physical reality remains complicated. Nearly 500 vessels including 220 oil tankers are sitting anchored outside the strait, unable to move while insurance markets remain effectively closed to Hormuz transits. The Trump administration is now weighing fee-based naval escorts and potential use of the Defense Production Act to compel US insurers to provide coverage. The White House is under pressure to translate the MOU into actual barrel flows.

The yen (JPY) and the New Zealand dollar (NZD) both firmed modestly in Asia-Pacific trade, with oil prices falling. Japan's Reuters Tankan showed two consecutive months of improving manufacturer sentiment. Singapore delivered its strongest export print in two decades on AI-driven chip demand.

New Zealand's current account deficit narrowed sharply on a quarterly basis. Consumer confidence fell to its lowest reading since 2023. War-related fuel costs and borrowing pressures bit into household sentiment. The kiwi traded in a narrow range.

China generated significant headline flow. The vice premier's CNY 300 billion special bond announcement to recapitalise financial institutions, paired with a pledge to vigorously resolve local government debt, represented the most concrete fiscal commitment in some time. PBOC governor Pan Gongsheng followed with a frank assessment that sustaining China's previous pace of credit growth is neither achievable nor desirable. He also advanced the groundwork for broader yuan internationalisation through new offshore FX and bond market steps in Shanghai. The offshore yuan (CNH) traded little changed.

In equities, Japan's Nikkei 225 was the standout, taking back early losses to print a fresh all-time high. Chinese markets lagged. The Hang Seng fell 0.7% and the Shanghai Composite dropped 0.2%. Reports that the US had delayed blacklisting DeepSeek and over 100 Chinese firms failed to lift sentiment. The dollar index was steady, with equities showing a divergence between Japan and China. The yen and the kiwi were the outperformers on the day.