JPY Slumps

The US dollar is mostly confined to narrow ranges against most of the G10 currencies today, ahead of the US CPI report and US corporate earnings. The yen is a notable exception. The dollar reached through JPY159.00 and has barely backed off. The ostensible catalyst is the heightened speculation of a snap election, which could be announced by the end of next week. Japanese government bond yields jumped at the prospect. Comments by the finance minister that the US shares its concern about the one-way movement failed to have much impact. The market awaits clarification of President Trump’s threat to impose a 25% tariff on Iran’s trading partners, but the authority is questionable, and the implementation is not clear, though it was declared to have immediate effect. Tomorrow is another decision day for the Supreme Court, and it is possible that the ruling on the president’s use of emergency tariffs will be announced. 

The US has suggested that cutting off Venezuelan oil to Cuba will starve the regime, but last year Mexico surpassed Caracas as Cuba’s largest oil source. Similarly, likely to the dismay of Washington, the EU appears to have struck a deal with China on EV imports, which include a minimum price (and other conditions). Separately, the EU reached a deal with Mercosur, though it still needs EU Parliament approval. Lastly, the EU is in late-stage trade talks with India.  

Prices:   

G10

• The euro’s bounce on the back of the subpoenas for the Federal Reserve stalled yesterday near $1.17, slightly above the minimum retracement of the euro’s recovery since Christmas eve. It is in an undecisive and narrow range between about $1.1655 and $1.1675, as US CPI and leadership is awaited. Nearby resistance is seen in the $1.1715-35 area.

• After initially being sold to nearly JPY157.50 yesterday, the greenback recovered in the North American session to JPY158.20 and posted its highest settlement since January 2025. Follow-through buying today lifted the US dollar to JPY159.05. The rally came after new reports played up the likelihood of a snap election and despite comments from Finance Minister Katayama who said she had talked with US Treasury Secretary Bessent on at yesterday’s G7 finance ministers meeting on coordination of critical materials and both shared “concerns about the one-way weakening of the yen”. If this was an initial step on the intervention escalation ladder the market took little notice. Options for about $650 mln at JPY158.50 expire today, and since the high was recorded, the greenback has not been much below JPY158.80.

• In sterling’s outside day yesterday, it frayed the 200-day moving average slightly below $1.3400 and reached $1.3485, which met the 50% retracement of the decline since last week’s high slightly of almost $1.3570. It settled above last Friday’s high (~$1.3450). It is in a narrow range (~$1.3460-$1.3485) today as it consolidates in the upper end of yesterday’s range. About GBP500 mln in options at $1.34 expire today. 

• The greenback traded inside last Friday’s range yesterday in a consolidative session against the Canadian dollar yesterday. Recall that the US dollar recorded a five-month low the day after Christmas (~CAD1.3645) and ran up to CAD1.3920 before the weekend. It is in a tight range (~CAD1.3865-CAD1.3890) in the lower end of yesterday’s range. Options for $900 mln at CAD1.3925 expire today. Initial support is in the CAD1.3850-60 area. 

• The Australian dollar reached slightly above $0.6765 last week before it retreated a cent into the weekend. Yesterday’s gain recovered a fraction more than half of its losses. The next hurdle is seen near $0.6730, but it stalled slightly above $0.6715 today and is fraying $0.6700 in the European morning. There are nearly A$2 bln of options between $0.6700 and $0.6710 that are expiring today. 

EM

• More often than not at the start of the year, the dollar has traded above MXN18.00 but has failed to settle above it. The greenback has forged a shelf around MXN17.87 and a break of it signals the next leg down. The dollar is holding above MXN17.90 so far today and as spent little time above yesterday’s settlement slightly below MXN17.93. 

• The dollar is recording an inside day against the offshore yuan, trading between roughly CNH7.9670 and CNH7.9760. Yesterday’s low near CNH6.9630 was the lowest the dollar has been/the strongest the yuan has been since May 2023. The PBOC shaved the dollar’s reference rate today to CNY7.0103 (from CNY7.0108 yesterday). 

• The dollar made a marginal new high since the middle of last month today against the Indian rupee near INR90.30 but is now trading near session lows below INR90.19. The central bank injected $10 of liquidity through an FX swap auction. 

• The US is close to agreeing to reducing the tariff on Taiwan to 15% from 20%. It would include an agreement by TSCM to build five more chip factories in the Arizona (estimated cost ~$165 bln). It has already built one and another one is to be completed in 2028 and has promised four more under the earlier agreement. Meanwhile, the Taiwanese dollar, which rose by a little more than 4.3% against the dollar last year (and slipped slightly against the Chinese yuan), has begun the new year off on soft tone, falling by about 0.7% so far in January. The IMF forecast last year’s current account surplus at nearly 14% of GDP. 

Other Markets 

• Amid speculation of an early election, Japanese equity markets re-opened after the long holiday weekend with a bang. New record highs were recorded as the Nikkei surged 3.10% and the Topix jumped 2.4%. Among the large bourses in the region, only China and India did not advance today. Europe’s Stoxx 600 is giving back the 0.20% it gained yesterday, and US index futures are trading softer. 

• Benchmark 10-year yields are rising today. In Japan, the 10-year yield popped 7.5 bp to nearly 2.16%, a new high. European benchmark yields are 2-3 bp higher. The 10-year US Treasury yield is a couple of basis points higher to knock on the 4.20% area. 

• Gold is consolidating after setting a record high yesterday near $4630. It is straddling $4600 today. Silver is firm but holding slightly below yesterday’s record high (~$86.25).

• March WTI is advancing for the fourth consecutive session. It is above $60 a barrel for the first time since mid-November. Thus far, it is holding below the 200-day moving average (~$60.60), which it has not traded above since late last September. 

Data

• While the markets’ mood has been soured by the newest attack on the Fed’s independence, attention turns to the December CPI. The median forecast in Bloomberg’s survey is for a 0.3% increase in both the headline and core rate, which would put both at 2.7%. Fed Chair Powell has suggested that the tariffs may have boosted inflation by around 0.6%. The futures market is pricing in little chance of a hike in Q1, and the CPI is unlikely to change that assessment. St. Louis Fed President Musalem and Richmond Fed President Barkin speak today, but their views are known. October new home sales are also on tap and are seen falling by around 10.5%, but the data is too old to have much impact. The president’s order for the agencies to buy $200 bln mortgages in an attempt to lower rates may have minimal impact, according to various bank economists’ projections. The US federal government budget balance may draw some attention. The CBO estimates the deficit at $143 bln, while the median forecast in Bloomberg’s survey is $152.5 bln. The deficit in the calendar year through November was $1.522 trillion compared with $1.931 trillion in the first 11 months of 2024. 

• Canada reports November building permits. After a nearly 15% surge in October, a modest pullback of 5.5% is the median forecast in Bloomberg’s survey. The market impact is likely minimal. 

• Japan’s November current account surplus rose by about JPY840 bln to JPY3.7 trillion. There had been a strong seasonal pattern of deterioration in November, but it was the third improvement in the past four years. The improved trade surplus helped. It rose to JPY625 bln from about JPY98 bln in October. Yet, despite the undervalued yen, the Japan still recorded a trade deficit last year. Still, the deficit has fallen sharply. In the first 11 months of last year the deficit was JPY983 bln compared with JPY3.7 bln deficit through the first 11 months of 2024.  

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