Ceasefire deal and divergent policies

Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halpenny, Head of Research, Global Markets, EMEA and International Securities. It's Friday 29th of May 2026 and joining Derek to pose some questions on the financial market themes for the week ahead is James Rolston, Vice President FX Institutional Sales. This podcast is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.

It has been produced for information purposes only and should not be construed as investment research or advice. MUFG, EMEA disclaimers and disclosures can be located on our website. Hi Derek, thank you very much for joining.

Happy Friday. Hi James, yes indeed, I'm the same to you. As always, there's so much to digest.

I think the easiest place to have a jumping off point is to talk about the potential of a US-Iran deal. Am I optimistic or is this looking likely? What are your thoughts?

This certainly feels more plausible, more credible. There's been no outright denials of details that have been reported, given the details. So yeah, it certainly looks this is the real deal.

It sounds like the noises coming from both sides are in agreement and it's the first time we've sort of had that in a while. So I'm certainly optimistic. Yeah, yeah, yeah, no, definitely, definitely.

But because of that question, I'm guessing what I'm leading to is that the markets haven't really reacted that much to this potential 60-day extension to the ceasefire. Is that the reason why we haven't seen such a big reaction so far? Well, I think, yeah, like as we all know with Trump, it can swing one way and then another way pretty quickly.

So it's still kind of awaiting his formal sign off, which we may get today or if it's not today, I would imagine over the weekend. But I think more generally, as you know, James, over the last couple of weeks, there's been this ongoing back and forth about news of a memorandum of understanding or points that have been agreed or haven't been agreed. So I think generally, the markets have been gradually pricing in, getting to this point.

And, you know, take, for example, Brent crude oil from the high at the beginning of last week were down over 18 percent. So certainly from an energy market perspective, you would have to argue that over the last two weeks, there has been a gradual pricing in of this kind of optimistic outlook. I think also then you need to see the details of, you know, we've got this rough 60-day extension of the ceasefire, the reopening of the Strait of Hormuz.

Iran is given 30 days to clear the Strait of any mines. And then there is this period of negotiation on the enrichment of uranium and the stock that Iran has, along with coinciding with negotiations on the easing of sanctions on the unfreezing of some of Iran's assets. So there's quite a lot to get through.

Ultimately, the most important element of it is, of course, the reopening of the Strait of Hormuz. And how that unfolds would be important, because if Iran has been given 30 days to clear the Strait, that could imply that there might not be that much traffic. Over the first 30 days, we're already getting evidence of a tightening of supplies and that kind of gradual, maybe more disappointing pace of reopening the Strait is an obvious risk that I think would probably curtail any further pricing of optimism until we get some clarity in terms of how that would unfold.

That definitely makes sense. So the optimistic view of us getting a ceasefire coming through now, but there's going to be a lag in a return to normal, I suppose, of trying to get the Strait completely open, cleared of mines, like you said, 30 days for that to happen. So that's still quite a lag for the markets to sort of build in and try to get past, I suppose, that the risk premium that's definitely built into most of the sort of situations at the moment.

Right. Yeah. Yeah.

Like, to me, if you consider Brent crude pre-conflict was averaging 70, 72-ish, something around there over a decent period before the conflict began, and we're trading just above 90. I can't imagine we get back into the 70s. I think the initial risk premium is going to be more substantial than that.

So we could get into the high 80s, maybe, and then settle there. So really, the bulk of this is already priced. And again, if you look at yields, generally coinciding with that drop of 18% crude since the beginning of last week, pretty much rates have been coming down generally over that period of time as well.

So and of course, risk carries on sometimes in its own world, but obviously driven by AI to a degree. So risk is still incredibly strong. So generally, financial market conditions are priced optimistically for this to go reasonably well.

OK, good. With that, we've had a couple of numbers come out with regards to the obvious knock-on effect, which is inflation. I saw that inflation was higher than expected in France, Italy, Spain, and Europe.

So I'm guessing that means that there's a potential for solidifying of this ECB hike that we were talking about before? Yes, absolutely. I think this element is possibly important to FX because I think on the European side and the inflation data that you just mentioned, James, that certainly, I think, will encourage the ECB to carry on, which is basically they've primed the markets for a hike at the June meeting.

And even on confirmation from Trump of this deal being confirmed, I just can't see the ECB backing down at this point in time. And we still have a fair amount of inflation that's in the pipeline that is ultimately going to come through. So from an ECB perspective and even from the Bank of England perspective, even though the Bank of England have certainly been less forceful in their guidance on hikes and have been kind of a bit more balanced, I would still say inflation is heading higher in the UK despite the more favourable inflation print that we had this month.

And there were some temporary factors or different quirks that helped keep it lower. But ultimately, the Bank of England and the ECB, we think, will still hike even under this deal. Whereas you move to the US and we have Kevin Warsh coming in, who we think is certainly going to be dovish, and maybe even the markets are underestimating the potential influence that he might have.

We've had inflation data from the US and it was broadly in line. The month-on-month moves a little bit less than expected. But if you go back to Warsh's nomination hearing, he said that he liked trimmed measures of inflation, because it kind of gives you the true underlying picture.

And the Dallas trimmed PCE figure came out yesterday, and that is up a mere 2.3% on an annual basis. And that's the third consecutive month that we've been in or around that level, which is the lowest rate since May 2021. So if that's what Warsh is looking at, he's going to push for looking through the energy price shock, especially in the context of a deal being done and the Strait of Hormuz reopening.

So given the fact that the curve in the US has a probability of a hike priced, doesn't have a full hike priced, there's still there, I think, potentially more scope for a reversal of the move that we've had more recently in the US. That kind of divergence in rate moves or monetary policy short-term dynamics would certainly point to the re-weakening of the US dollar. Yeah, yeah.

And I think the market's sort of digested that today as well, with gold jumping up above the 4,500 mark. So that's probably an indication that they're seeing that there is that potential for the Fed to differ to its colleagues in Europe and the UK. Yeah.

Yeah, definitely. And it's not just Kevin Warsh, but obviously he's going to have some influence, but he needs to build support. He's not going to have full support on day one, but there's also other Board of Governors who would have the same kind of leaning.

Michelle Bowman has spoken and her comments today were certainly indicative of being more in favour of moving rates lower going forward. Great, great, great. Thank you.

I'm guessing divergence of rates is a nice little segue into Japan as well, because unlike Europe, the inflation numbers that we've just got from Japan, they're actually a little bit lower than we expected, right? Yeah. So we had the Tokyo data, which was certainly on the weaker side.

However, you know, the government's kind of policy influence is certainly at play there. So, you know, the gasoline subsidy and then Tokyo specifically has childcare subsidies, water rate subsidies, and all of these factors have helped to depress the overall annual rate. And again, similar to, say, for example, the UK, where we've had weaker inflation as well this month, you know, the outlook going forward is still that we're going to see a move higher.

So I don't think it alters what the BOJ has been doing of late, which of course is preparing the markets for a 25 basis point hike at the next meeting in June. So I don't think today's data will scupper that, especially given, and maybe we'll talk about it now, you know, the intervention and the fact that dollar yen is nearly back at 160, where we were at the end of the month ago. The rate hike of the BOJ up to 225 is probably going to help that intervention number of the 160 of dollar yen that we sort of keep mentioning in these sort of discussions.

That we got earlier today, the intervention numbers over the last month, what was your take on them? Yeah, a little bit bigger than expected, based on the BOJ current accounts changes each day, measuring kind of bank reserve changes. The estimate was a little bit over 10 trillion.

So the figure came out at 11.7 trillion. So that was the biggest one month intervention total and surpassed the intervention of May 2024 when we had just under 10 trillion of yen buying. So the largest, and given the spot's price action, the least successful.

And that's down to what we and others were saying when the intervention took place. And that is that the fundamental backdrop just wasn't conducive to any kind of sustained move lower for dollar yen. And that was, of course, higher energy prices, higher global yields.

So if this deal is going to sustainably reverse that move, well then, ironically, it won't be that record-sized intervention, it'll be developments abroad that will ultimately potentially prove more successful in getting dollar yen lower. Yeah, timing is everything. Yeah, and timing has come to support the BOJ and the MOF in the past.

I mentioned that April-May 2024 intervention. That was the next least successful because, of course, they intervened again in July 2024. And in April-May 2024, US yields were elevated between 4.75% and 5% front-end yields through that intervention period, and therefore it wasn't successful.

But the other interventions, different developments, resulted in yields coming down quite sharply. And the drop in US yields after the other bouts of intervention resulted in a big move in dollar yen, 20 big figures lower in September-October 2022, and again in July 2024. So those interventions were successful because of developments in the US.

And again, if this one's going to be successful, in quote marks, that will be because of this deal that could be a game-changer in terms of energy price action. What did you think of Kadayama's justifications for the intervention? Tenuous at best.

Just take a look at dollar yen, one month implied volatility. Two days before intervention on the 30th of April, one month implied vol had dropped to its lowest level in nearly two years. And vol today is even lower.

We're back at levels. Dollar yen implied one month volatility is back at levels trading just before the beginning of the Russian-Ukraine conflict. So intervention now, if it was to happen, and they're still threatening it, you can't really argue that volatility is problematic.

Speculative selling was the other factor she cited. Yeah, again, you can pull different bits of data and say that's signs of increased speculative selling, but it's quite subjective. So yeah, I think everybody knows it's more about the level and not wanting to see dollar yen surge if 160 did break.

Okay, so I'm guessing it's let's see how the weekend transpires. If Trump does give his agreement on this ceasefire, then hopefully we'll see dollar yen fall a little bit lower and this intervention was all just good timing then. Yeah, like again, dollar yen, I can't imagine we're going to see a big drop, a big reaction if we do get this deal confirmed.

As we were saying earlier, James, a lot's priced. So I don't see front-end yields coming down notably that would result in dollar yen dropping more notably. Indeed, a bigger reaction would probably be the opposite.

So this deal breaks down. There's more threats of military action that I think would get a bigger reaction next week. But certainly over time, if this deal is agreed and it lasts, therefore it becomes more credible, then I think it has a more meaningful impact on the markets.

And yeah, dollar yen should certainly start to gradually grind lower. Okay, that sounds great. Sorry to jump into a different conversation, but it would be silly of us not to touch on how well the Kiwi has done this week or this month, indeed.

What do you feel is behind that and is there anything that we can look at going forward? Yes, definitely worth a quick mention. The drop in Aussie Kiwi on Wednesday, 1.5%, the biggest one-day drop since 2016.

So a pretty significant move and our own quant analysis on that, when you look back at those scales of moves in the past, it's certainly indicative when it coincides with the compression in rate spreads, it's indicative of more Aussie Kiwi weakness going forward. So I think we're open for this move extending further. And of course, it's in reaction to the RBNZ meeting, where there was definitely a more hawkish tone and a pretty clear message that rate hikes are coming, potentially at the next couple of meetings.

And indeed today, we had Assistant Governor Silk saying that a 50 basis point hike would be on the table at the next meeting in July. So, you know, Aussie Kiwi has been on a steady march higher and that has coincided with a positive policy divergence story favouring RBA over the RBNZ. And now the RBA could be on the sidelines, they've indicated that the proactive nature of their policy actions this year means that they can move to the sidelines and assess the impact of the conflict, whereas the RBNZ are now just getting going with their hiking.

So we can see some reversal of that widening of spread in favour of Aussie that we've had. And that certainly is indicative of Aussie Kiwi going further lower from here. So, you know, the whole Aussie bull run, I think a lot of it's now priced.

And the fact that the RBA is moving to the sidelines, you know, maybe we're in for a period of consolidation at best in terms of Aussie dollar performance going forward from here. Brilliant. Derek, that's fantastic.

Thank you very much for summing everything up. We've got a lot more to digest in the weeks ahead, especially over the weekend. So I look forward to speaking to you again on Monday.

Indeed. Have a lovely weekend, James. I'll be celebrating, hopefully, an Arsenal Champions League victory.

Best of luck for Saturday. All right. Cheers.

Thank you very much, Derek. Bye bye. Thank you for listening to this MUFG Global Markets podcast.

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