The desk believes that the current turmoil in financial markets is indicative of a growing crisis of confidence in US assets, as highlighted in the recent MUFG EMEA commentary. This sentiment is underpinned by a lack of viable actions to restore confidence, which could lead to continued volatility in the FX market. The desk notes that the Japanese yen (JPY) may be particularly sensitive to these developments, especially given the Bank of Japan's (BoJ) current stance amid this uncertainty. Per the full note source, the implications for USD/JPY and broader market dynamics are significant as traders navigate this precarious landscape.
What the desk is arguing
The desk posits that ongoing financial market turmoil signals a deepening crisis of confidence in US assets. This sentiment underscores the urgent need for stabilizing measures, yet the feasibility of these measures is questioned, suggesting that market apprehension might continue to escalate.
Furthermore, the implications for JPY and the BoJ's response are critical as they navigate these choppy waters. Should confidence in US assets plummet further, the JPY may emerge as a safe-haven alternative, thus affecting its valuation relative to other currencies.
Where it sits in our coverage
Currently, our consensus target for the USD/JPY pair stands at 1.075, with a firm spread reflecting a range between 1.04 and 1.12. This aligns closely with the current sentiment where confidence in US assets dictates market behavior, suggesting potential downward pressure on the dollar against the yen.
Specific firms have outlined their targets, which vary but reflect a similar outlook:
Contrary views are held by several firms, indicating varied expectations for the USD/JPY trajectory. For instance, BofA projects a lower target of 1.04, suggesting a more pessimistic outlook on the dollar's strength.
01Confidence in US assets is waning amid market turbulence.
02Actions needed to restore trust are seen as unlikely.
03The JPY could benefit as a safe haven in this climate.
Market implications
Should the crisis of confidence in US assets deepen, we may witness increased volatility in FX markets, particularly affecting the USD/JPY pair. The speculative shift towards JPY could lead to a stronger yen as investors seek refuge.
Risks to this view
The potential for further financial instability poses risks to the alignment of market dynamics, affecting currency valuations unpredictably. Additionally, geopolitical tensions or unexpected monetary policy shifts could exacerbate these risks further.
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, 11th April 2025, and joining Derek to pose some questions on the financial market themes for the week ahead is Chris Jakubowski, Director of Institutional FX Sales. The following podcast is intended for professional investors and eligible counterparties only and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hi, Derek. Chris, hello.
How are you? Yeah, very well. Thank you for keeping my head above water.
How about yourself? It's been a dramatic week, for sure, for sure. Lots of client requests and different aspects being analysed and focused on.
So, yeah, a lot going on. It's difficult to try and find a way to look at it because everyone's just trying to figure out how Trump or what Trump's actual idea is here with all these different, yeah, we don't know what they are. You know, is he trying to get better trade deals?
Is he trying to get more jobs back in the US? Is he trying to fill the coffers with money? It's like, where do you start?
And then he's back and forth. So anyway, yeah, it's been difficult certainly to speak to clients. But let's jump in, I guess, with that.
And I think, you know, he was denying that it would ever happen, but we have a 90-day pause. Weaker equities, weaker dollar, and probably the straw that broke the camel's back was the bond market, and it normally is. He was probably given a lot of pressure when we saw weaker treasuries and high yields as well.
You know, he's got himself into a bit of a pickle here, it seems. What do you see in the next? How's your head fixed for the next, I guess, 90 days, right?
What is more going to change in that time? I mean, people are, it feels like we just need the dust to settle, and we need to figure out what's going on. But I mean, from your perspective, what have you been telling clients?
Because it's hard to get, actually, an outlook for yourself. Yeah, well, you know, I was presenting to clients in Amsterdam on Wednesday. So I came home and by the third of the morning, I was like, wow.
So it's, you know, it's extremely difficult, obviously, to forecast and predict the whims of an individual with, I'm sure he's been influenced, but he seems to be influenced by a relatively small number of what I would call hardcore trade policy individuals. Stephen Mirren, Howard Lutnick, and Jemison Greer. And you know, it's a small group must be influencing him.
And to go to your point at the beginning in terms of what's the ultimate objective, to be honest, it flips and varies from day to day. But, you know, in terms of, I do think tax cuts are a really important aspect of what Trump wants to do. And in that sense, I think certainly his idea of tariffs, filling the coffers to finance the tax cut plans, I think, is definitely part of it.
And that's why I think, you know, some level of tariffs, I think, are going to persist for a considerable period of time, perhaps through the entire administration. But I think when you look at the Treasury market, as you've mentioned, you know, the 30 year is through the roof. And, you know, incredibly, just looking at the 30 year yield today, since around the middle of February, the 30 year yield, which obviously dropped, but has now rebounded.
But over the period since the middle of February until now, the 30 year is now up 10 basis points. And over the same period, the S&P 500 is down 30%. So, you know, we've had this very clear period of triple selling.
And we've done some analysis on that in terms of picking out periods when you've had the scale of triple selling that we've had this week. And, you know, statistically, from a cons perspective, it points to dollar depreciation over a two and three month period. So, what we've got to come back to is, OK, it's clear what's driven all of this.
It's Trump's mad policies that he announced with this ridiculous formula that gave us these figures for global tariff rates. And he's pulled back on the vast majority of those. But like nobody in their wildest dreams would have predicted 145% tariff on China.
So, as we stand today, like you mentioned, 90 days, I don't think we have that long. I think something has to happen before that or else things are going to unravel pretty quickly. And it's very clear that we're entering a crisis of confidence in terms of US interest.
In terms of him as well, because it's a question which we can go to afterwards as well. But on that 145%, which you touched on, you know, I was reading as well, and I have sympathy with this proposition, it becomes meaningless. You know, what they go next, they go 200%.
I mean, it essentially already has frozen trade in the sense that it makes it completely impossible to really use those tariffs to continue trade between the two nations. So they're basically putting the brakes on trading, right. And, you know, the small business and businesses have been, you know, they've been speaking to across the areas like suddenly, you know, tax tariff bills go from 20% a year to 300%.
And, you know, that's real economy stuff. This is stuff where it hits the electorate more than the people that are making, you know, he had that mistake as well. He said, yes, you know, one of my good friends here made 200 billion.
You know, these people aren't getting affected. It's the people that voted him in, right? Then this fallacy of thinking that we're going to suddenly get a rebirth of the Rust Belt, the blue collar jobs will come back, people will have more money.
You know, the only thing I can see at the minute is the immediate or the most, the quickest effects that's going to come through is inflation through to the individuals and the people that buy the cheaper products that come from China. And the real inflation is going to come through and hit the consumer purse immediately. And he's just going to surely he's going to lose favor with the electorate in rather, you know, dazzling fashion.
It's just it seems unhinged. I mean, to your point, you know. Yeah.
Yeah. You know, it's it's certainly going to hit probably, you know, maybe not in the next month's data, but the month after based on looking at the tariffs were implemented on washing machines in 2018. It takes a month or two before you see it physically in the CPI.
Yeah. But it's still it's still coming and it's going to come before the Fed meeting in June, which is fully priced for a 25 basis point cut. And you've got to question the the prospects of that when the curve is steepening and the long end is is selling off so dramatically and you get to a point where you've had this big jump in month on month inflation and you can't really.
You can't the Fed can't really have a sense of the broader reverb reverberations of that in terms of inflation expectations and broader product prices. And of course, domestic producers are going to be lifting the prices as well because they can see the opportunity. So it's it would be risky to cut.
Now, obviously, if the labor market unravels in the next couple of NFPs before the June meeting, well, then, yeah, you know, but it's not a done deal and it's the market is still very much priced for it. So I think there could be disappointment there, which could obviously reinforce the asset price selloff that we're in the midst of as well. So do they not discount it a little bit?
You think the Fed in looking at it, because I was thinking about it like from a supply side shock, right? It's not so much demand led. So it's not like the inflation is coming from consumer or the economy being overheated in the US.
It's largely coming from the supply side shocks, which are coming from tariffs, which are increasing prices. So arguably that isn't actually a reaction function of monetary policy in the US as internally. And because of the, you know, the real economic effects that we've spoken about, like, you know, the consumer price going down and people potentially losing their jobs.
Do you think that they would still go, OK, you know, we're arguably stagflationary territory, right, where the economy slows down. Inflation is going up. Do they, did you think that that went tip them in favour?
I mean, you said you did know that there, that if the employment date comes off, then they might. Yeah, but I think we're in a different world post-COVID, post the largest global inflation shocks since the late 1970s, early 80s. And as we were walking up here, we saw the Michigan consumer expectations figures and short term and the five to 10 year both jumped.
And, you know, what's happening and what I think is one of the reasons hurting the dollar is is real yields are coming down pretty sharpish because break evens are certainly at the short end of the curve are still very sticky. They're not coming down. Nominal yields have come down.
Therefore, real yields are coming down, which is a real negative for the dollar. And but now I think we've even gone beyond yields. And if you look, certainly if you look at nominal yields, perhaps there's been a breakdown and the dollar has now extended much weaker than what's applied by rate spreads, which is an indication of of a loss of confidence.
Those kind of normal day to day variables that drive FX are basically at the window. And it's it's a question of confidence and it's down to positioning and stress and covering losses. And that means, you know, euro dollar 120, which was laughable a week ago, is now, you know, it's it's very feasible.
And that's why I think something has to happen. So there's a tariff shift by the Trump administration. There's something they shift on their tax cut policies, which, you know, I don't think it's a coincidence that the bill was passed in the House this week.
And the figures in it is just, you know, it's ridiculous that they're considering adding over five trillion. Yeah, but then they asked that the best examples that they raised two trillion from the tariffs. And that's that's assuming that the trade continues at the same level with those tariffs.
So it's still unfunded, isn't it? Yeah. All aspects of it is not credible.
Also, they're talking, although it's not in the bill. Mike Johnson has said 1.5 trillion of spending cuts is doable. I just don't think it is.
So there's a lot of question marks. And ultimately, investors will see what they're doing as deficit financed spending cuts or sorry, tax cuts. And yeah, it's just going to reinforce the loss of confidence.
So they either shift on that, they shift on tariffs. I think the idea of Fed support is very questionable. You know, we're at QT five billion per month.
OK, they could end QT, but like we're talking trillions about these budget deficits over a 10 year period. So I think ending QT is not going to do anything. Would they go into restarting QE?
I think in this environment, no chance. The only way the Fed comes in in a meaningful way is if there's also a policy shift. There's no point in the Fed trying to do something if what's triggered the crisis is Trump's policy without changing Trump's policy.
So that's not going to happen either. And then this kind of other element that's in the background all the time, and I'm getting asked questions about it all the time, is Steve Mirren's piece that he wrote about, you know, restructuring the whole global trading framework and the need for a weaker dollar and a kind of a new accord forcing China and Japan into perpetual bond purchases and then lowering rates and allowing their currencies to strengthen versus the US dollar to get a weaker dollar. And again, now Steve Mirren is now he's now Trump's head of his Council of Economic Advisers.
OK, we know from his written piece that's his view. He says it's not part of administration policy. But nonetheless, when you see the people in the administration, you see what they're doing with tariffs.
Investors are going to conclude they want a weaker dollar. And they may need to come out and try and temper that or make comments that are very explicit, but they're not looking at an accord to weaken the dollar. And they're not trying to weaken the dollar.
But that, I think, is also reinforcing the negative sentiment that we have at the moment, because it is there in the background. What does the Trump administration want? Investors think they want a weaker dollar.
Yeah. And what do you putting the US to the side then and the other party that's involved is obviously China. You know, they don't seem to want to back down about this.
It's going to take two to party on this, two to tango as such. So, you know, even if they want to they want a tariff shift, China going to play ball, China going to give enough to Trump because Trump's going to need to keep face in front of his electorate. Right.
And they're going to give him enough to be able to do that tariff shift, which I think is probably the most likely. I think he'll have to shift on their their unfunded tax spending as well. But but also, yeah, they're going to they're going to play ball because currently he's only having meetings with foreign other foreign counterparts as opposed to, you know, he's obviously trying to talk to other nations, trying to sort out new trading agreements and sidelining the US, much like the US is trying to do by talking, you know, to the likes of Vietnam and the rest of it and trying to broker deals there.
But, you know. Yeah. Yeah.
Well, let's not forget also that, you know, saving face is ingrained in Chinese. Yeah. True.
Yeah. So there's I just don't see any chance that China are going to back down, given it's very clear that the US initiated this trade war that ultimately we now have between the US and China. So I think it would have to come from the US side.
Now, of course, China have retaliated today, lifting it from 84 percent to 125 percent. So for Trump to back down any time over the next couple of days seems quite unlikely as well. But having said all of that, we're talking about Trump.
And if there's one thing Trump is, it's unpredictable. So they did it for the rest of the world in terms of a 90 day suspension. It just wouldn't surprise me.
And ultimately, it's going to be the markets that force Trump into action, the markets or Congress. And of course, Congress and the markets is linked as well. But, you know, the Republicans in Congress, they've got to step up.
They've got to they've got to use their power to try and stop what Trump is doing. Now, the worse the markets get, the more encouraged the Republicans in Congress will be to tackle the White House. But as you can hear from what I'm saying, all avenues are through the markets getting worse than where they are today.
Yeah. So it may mean next week things get worse in order to force Trump to maybe postpone the Chinese tariff for 90 days as well. Because, I mean, he doesn't have ages either with, you know, the midterms in two years.
And if he wants to, you know, if he wants to continue to, you know, have the three wings of control that he does at the minute, he needs to make sure that he I mean, this is a car crash. Yeah. As you know, Chris, we've spoken about before.
Our view, even before all of this happened, was that the US was entering a cyclical slowdown. And that's why we had dollar depreciation in the second half of the year. And by the way, our euro dollar forecast at the end of the year was 114, which was much more aggressive than the rest of the market.
And yeah, of course, we've already hit that. But of course, now that cyclical slowdown is going to be reinforced by, you know, what's happening in equities and the elevated uncertainty in relation to Trump. So in a way, damage is done and the prospects of recession are considerably higher.
And yeah, unless there's a rapid turnaround and improvement, I think that's where we're heading. And in that sense, maybe investors in terms of FX, they're seeing that further out. They're becoming more convinced on a recession heading.
And that's why they're kind of bailing out and going into, you know, again, I've said to you, G10 performance standard top three currencies in terms of risk aversion, Swiss franc, Japanese yen and euro. And certainly from a yen and euro perspective, they're the biggest, most accessible bond markets to go to if you don't want to give them to US treasuries. And the spreads that we've seen move this week, you know, there's been a big, big outperformance, much bigger outperformance than usual for core German bonds, basically, and JGPs.
You know, we've seen the US spread over those 10 years widen out dramatically this week. So it does look like from the price action that we are seeing a shift in investors into those bond markets. And yeah, the currencies are performing as you'd expect.
Okay. And let's move on to Japan now, specifically the BOJ. Our friends in rates, MUFG have taken out their hike call for the year out to Jan 26 now.
It feels like the market has priced that as well. What are your thoughts here? Do you think that, you know, there are potentials?
I mean, there's been better communications between Japan and it's been some positive music around that. Do you think that the economy will fare better than, you know, some of the other nations and they'll get away with it? And what are your rate expectations?
And then we did touch on the yen, but being a safe haven, but what are your thoughts there as well? Yeah, like I think, first of all, you know, when you're in this kind of market turmoil, the yen influence was always going to be safe haven flows rather than the kind of shifts in monetary expectations in Japan. And of course, BOJ's rate expectations by the end of the year have come down markedly.
Interestingly though, Ueda spoke this week and he could have easily given an explicit message that they were moving to the sidelines because of all the turmoil and, you know, that would have shifted expectations even more, but he didn't. So, you know, I do wonder if they're being a little bit careful about not wanting to elicit any kind of sharp reversal in the yen. Now, again, I still think the broader market conditions are more important, but nonetheless, if those stabilised and the message from the BOJ was we're on the sidelines, there's a risk then the yen could weaken back quite notably.
And of course, in terms of the trade negotiations with the US, Scott Besson's messages in the past have indicated that, you know, he believes BOJ monetary policy is at the root of yen depreciation. And if they believe there's a currency misalignment and the yen starts to weaken after BOJ communications, it wouldn't help. So I think they're probably being careful over the short term to try and improve the backdrop for a quick trade negotiation and a deal being done.
So that makes sense to me. In terms of BOJ monetary policy. Yeah.
Yeah. Like we haven't formally changed our view, which was July. I certainly think July is going to be very difficult unless there's a dramatic change in the next kind of couple of weeks.
So we'll probably be pulling back our view as well. But yeah, you know, the BOJ, the JGB market is what it's over a thousand trillion yen, which is about eight and a half trillion dollars. It's a huge market.
Of course, for the first time in nearly any of our careers, when we go into a crisis, we now have a scenario where in actual fact, going into Japan, you've got yield as well as the other advantages. So, you know, I think the Swiss franc is outperforming the yen, which I can understand based on if there was a sudden rebound in US rates, investors might be thinking the yen would weaken. So maybe the Swiss franc is a cleaner safe haven choice at the moment.
But of course, the SMB could start to voice disapproval. They could start intervening. They could cut rates to negative.
There's things the SMB could do as well. But I get over the short term why the franc is outperforming the yen. But there's still the two currencies of choice.
OK, great. Thanks very much, Derek. I won't take any more of your time.
Probably have the weekly to finish off. So I'll let you rush off and do that. So yeah, just leaves me to say thank you very much for your time.
Indeed. Thanks. Thanks, Chris, for the chat.
Cheers. Thanks very much. Thank you for listening to this MUFG Global Markets podcast.
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