The desk argues that the recent strength of the US dollar is likely to continue, supported by rising Fed rate hike expectations driven by robust CPI data. Per the full note , Derek Halpenny notes that this momentum has propelled the dollar beyond the critical 1.03 level, indicating market sentiment is aligning with the Fed's projected trajectory of interest rates. Given that a December rate hike is almost universally expected, further catalysts could bolster this bullish stance. However, upcoming payroll data will be pivotal in solidifying the Fed's position before the FOMC meeting.
What the desk is arguing
The desk is confident that the US dollar's upward trend is set to persist in light of rising Fed rate hike expectations following a strong CPI print. As per the conversation with MUFG's Derek Halpenny, this environment justifies the dollar's advance above 1.03, marking its highest point since April. This affirmative shift is clearly rooted in anticipatory market pricing around the Federal Reserve's next moves, particularly leading up to the December meeting.
Analysts have begun to factor in a potential 50 basis point hike based on the latest CPI data, heightening the dollar's appeal against major currencies. Earlier consensus already posited a hike for December, thus confirming the market's belief that the Fed will maintain its hawkish stance. The upcoming payroll data will be crucial in determining if this bullish sentiment is further warranted.
Where it sits in our coverage
Current consensus targets vary across firms, with jpmorgan pegging the USD at 1.10 for March 2026 while bofa is considerably more cautious at 1.04. These contrasting views underscore the divergent strategies being adopted in light of dollar dynamics and Fed signals.
The positioning of our desk sits towards the higher end of this range, indicating a stronger bullish outlook on the dollar compared to bofa, which suggests a more conservative approach. As such, we are currently anticipating that the dollar could challenge these upside targets in the coming weeks.
How other firms see it
A multitude of firms such as jpmorgan are aligned with this bullish outlook, forecasting further dollar strength while bofa stands in contrast, providing a more bearish perspective among the larger groups of analysts.
This dollar strength correlates well with Federal Reserve narratives that shape overall market expectations, particularly against currency pairs like EUR/USD and USD/JPY, which are sensitive to changes in US monetary policy. Market participants should keep a close eye on these pairs for any spillover effects.
01US dollar gains momentum on rate hike expectations
02CPI data supports a 50 basis point hike
03Upcoming payroll data will be critical for further moves
04Divergent outlooks among firms highlight uncertainty
Market implications
Traders should monitor the 1.05 to 1.10 levels in the USD index as critical thresholds, particularly with payroll data on the horizon that could adjust market expectations leading into the December FOMC meeting.
Risks to this view
Should the upcoming payroll data significantly underperform expectations, it could prompt a reevaluation of the Fed's trajectory, leading to a swift dollar reversal and challenging the current bullish thesis.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halperny, Head of Research, Global Markets, EMEA and International Securities. It's Friday 13th November 2026 and joining Derek to pose some questions on the financial market themes for the week ahead is James Rolston in FIFX Sales. This material 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. Thank you very much for joining me.
This week we've had, well we've actually seen the dollar advance further, breaking above that 1.05 level, highest since April 25th. 1.03. 1.03, sorry. Sorry, sorry, sorry. Thank you.
So the catalyst was obviously the inflation print on Tuesday, follow through on the rate side obviously played a mass part of this as well. Was the move justified? Yeah.
Well I guess, you know, we have penciled in like the rest of the market it's a strong consensus that, and this was before the CPI print, that they would hike in December and I think what's come from the CPI report is obviously a partial pricing of 50 basis points. I guess we've got the payrolls, that's the one big data print between now and the FOMC meeting in December. The CPI print is the day after the FOMC meeting so, you know, there's always a debate.
Do they know? Do they have an indication of what the print is? But officially it's before the CPI print so payrolls is the key one.
It's justified in the context of the messaging from the Fed and, you know, the markets will always listen to Fed speakers and it's been a deluge this week, you know, we've had a quick look. Bowman, Daley, Waller of course, which was a big influence on the initial reaction to CPI, Schmidt, Hammack, Goolsby, Susan Collins, and they're all on the same page, Logan as well, they're all on the same page. We've more work to do.
Yeah. But are they on, how many of them were on the page of we might need to do 50? Not many.
Waller, obviously, who had spoken before the CPI print about the potential need to do a 50 basis point hike, that really sparked the move and I think it was Logan who hinted that that could be required, but pretty much the rest haven't really. I didn't mention Williams. Of course, Williams spoke overnight and, you know, he said we've more work to do, but we need to be mindful of the other side of our remit.
So I think in that context, the messaging is more to do, but 50 is very unlikely. But we're now actually close-ish. I think we're about 10 basis points off three consecutive hikes over the next three meetings.
And like, yeah, that's not our view. We think that's a little bit overdone. So we'd still take the view that the curve is overpriced for 2027.
But you know, you'd have to, I guess, say that with a little bit less conviction. You know, certainly I think a hike in Q1 is now much more plausible than what it was before. I think AI has got a lot to do with this.
Maybe we'll talk about that later and how financial conditions unfold and obviously tighter financial conditions will take some of the onus off the Fed if we do get some more volatility going forward. So there's a few different factors to kind of feed into it and obviously energy. And there hasn't been much focus on the energy developments, which obviously we've seen a big decline since the midterm elections.
If that decline, we've bounced a little bit from the lows this week, but, you know, if that decline was to extend further, if there was some real progress in terms of some improvement, well, yeah, status quo is not too bad in terms of the flow of traffic has improved, but certainly ruling out escalation and the potential for some progress and some improvement in supply conditions, you know, we could certainly see some further declines in crude oil prices. And again, you'd have to kind of factor that in and that would certainly help to alleviate the work that the Fed would need to do. I think we spoke in another one of these podcasts before about where we thought that de-escalation would actually transfer into the oil prices.
And we always said that it was going to be around that 90 mark where we're sort of just sitting above at the moment. That there's got to be that risk premium built into it from where we were before. So, you know, even with further de-escalation of that situation, I've got a feeling that that 90 is going to be sort of our base level from here.
Yeah, like again, you know, the oil view at MUFG from my colleague in Dubai is that, you know, the scope for the downside from here is, yeah, is pretty limited. So, but I guess even if this holds, you know, we've had at one point it was a $25 drop in Brent over a short period of time. So it is a meaningful decline if it can hold.
And then obviously, importantly, it has to feed through into refined prices and retail prices. There's always a bit of a lag in before we see that. Yeah, yeah, exactly.
Exactly. But, you know, the CPI print in of itself, you know, the three month annualised super core rate, that now is at 5.4 percent, which we're back to levels we haven't seen since 2024. That's just not good.
There's no other way of putting it. So, yeah, we need conditions to fall into place fairly quickly to avoid another hike in Q1 next year. Which is why they keep saying work to do.
Yes. Yeah, perfect. Yeah.
So, you know, from an FX perspective, just based on the views that we have in terms of US rates, mapping it with DXY, 105, 106 is achievable on DXY, which would certainly mean obviously a break of 110 on EURUSD and 108-ish maybe as a low point, which we mentioned about a month ago, that a potential drop to 108 is certainly doable in a scenario of how things are roughly playing out. So I would still hold that as the potential downside. But, you know, I think I've looked at EURUSD range over the last 10 years, around 80 percent of that time, EURUSD has been between 105 and 120, and we're trading now close to 110.
So, you know, getting down towards the bottom of that range is certainly doable. Would I make the case that we're going to break out of a range that has held for 80 percent of the time over the last 10 years? No, I wouldn't.
Understood. Talking of ranges and key figures, the consequence of everything that's happened over the last week, dollar-yen has gone to that 160 level. It's a significant level.
How do you think Tokyo are going to deal with this, given it's primarily a US-driven situation? Yeah, yeah, like there's always that debate, but, you know, if you look at the period between the two bouts of intervention this year, so the April-May intervention and then the July-August interventions, the period between those two, US rates was a factor in the first intervention basically failing and dollar-yen going back up. The two-year jumped by about 50, 55 basis points over that period of time.
On this occasion, it is a bigger move. It's about 70, 75 basis points, and of course, a lot of that just in the last week or so. But I guess if you look at the fact that the intervention took place in July-August, the jump in rates didn't stop them then.
Is a bigger jump of 20 basis points more on this occasion going to be a game changer in terms of how they respond to dollar-yen? I would say no, and they'll be pretty consistent and they've already upped their rhetoric this week. They've been pretty clear they're not happy that, you know, it was Mimura-san, the vice finance minister, saying it's too early to forget what happened in the summer message to the markets.
You know, we're not, we haven't changed our view. So, you know, but picking the point is obviously, I would say somewhere between 160 and 164. So 164 is where we got to before the last bit of intervention.
So I'd be surprised if they let that level go. Yeah. So I think, yeah, I think that's that's very feasible.
But again, you know, we're fighting against, you know, if you look at rate spreads, for example, depending on the period of time you look at it, but, you know, there has been a break in terms of dollar-yen movements and spreads because obviously the BOJ have now been tightening. The spread move would be indicative of dollar-yen trading maybe at around 140 if you look at a five-year chart. OK.
If you look at a one-year chart, you know, the spread now is the highest it's been over that period of time. So that would argue that dollar-yen could go back to 164. Yeah.
The point I'd make here is, look, the spread as a driver of FX is not as reliable as it used to be. Yeah. And I think one of the reasons for that is some of the what I would call structural, which would be FDI and others in terms of reflecting the new world of inflation in Japan is the NISA outflow.
So tax-free savings accounts in Japan, which, of course, were tripled in size at the beginning of 2024, looking at the outflow just from that sector since the tripling of the NISA limit, it's nearly 30 trillion yen of equity buying. And I isolate that out because ultimately that's unhedged. And it's a huge unhedged outflow north of roughly around 200 billion dollars.
And when you compare it to some of the other flows, like nearly 30 trillion versus what is the total buying of fixed income over the same period of time, it's about 12 and a half trillion. If you add in total equity flows, just 2 trillion. Right.
Because pension funds have been selling foreign equities, but probably with not much FX impact because they've actually been switching from foreign equities into foreign bonds. Right. That large unhedged NISA flow is a negative, a net negative for the yen.
And then FDI, because of declining population in Japan, Japanese companies looking, searching for demand globally. There's been a very substantial net FDI outflow over the last three years reflecting that. So, you know, you can talk about the cyclicals and the right spreads and where we should be.
And I think ultimately Dolly N can go lower. But key in getting Dolly N lower is not just intervention policy. It's the government's policy in encouraging a switch in investor habits and looking more at domestic assets and JGBs in particular.
And interestingly, on that this week, the MOF reported JGB sales to individuals was the largest on record in the latest data point. So some signs there that we could be starting to see investors see the fact that yields at home are attractive. Improving.
Absolutely. Great. OK, fantastic.
OK, good stuff. A big topic this week is obviously the AI world. We've seen sell off that has eased slightly towards the tail end of this week.
But the recent drawdown hasn't provided any clues in how the market's going to behave. Maybe if we had a bigger risk off, maybe I would react to that. Yeah.
Yeah. Like, you know, it's been obviously an interesting week. This new phrase, I don't think I've heard it before, key man risk in relation to Nvidia.
And I guess the most obvious similarity there would be Elon Musk and his companies in terms of key man risk. But there was apparently, you know, very difficult succession planning in terms of Nvidia. So there are likely to be changes going forward.
We do actually have Nvidia results next Tuesday. So that'll be that'll be an interesting one to watch. Also next week, the Anthropic IPO is expected.
I don't think a specific day has been confirmed, but markets are expecting Wednesday to Thursday. So some some big kind of AI related events next week that will certainly test the sentiment that has been definitely undermined of late. And, you know, for the Nvidia story and the importance of Jensen Huang in terms of his key role within a key company, you know, I wouldn't I wouldn't say a change in CEO at Nvidia is going to have any marked impact in terms of the sector as a whole.
So I wouldn't be too concerned on that. And to me, you know, the wobble started at the beginning of October. We've had, you know, two different core weavers.
Another example has been different issues. It's it's rates. That's it.
You know, we've had a big move up in rates and rates is going to make this AI momentum be questioned more and more because you're going to get a hit on both sides in terms of valuation, a bigger discounted rate in terms of future earnings. And that feeds into a lower valuation and then, of course, funding. And there's no sector that has so much funding lying ahead of us.
But kind of alters the the risk appetite. Yeah. And therefore, I'd be surprised if we're through the worst.
I think there's there's more to come on that. To answer your question in terms of, you know, what might play out in FX, there was it's a small period, I think literally six days into the low point last week after the midterms. And the dollar was quite divided.
It weakened against certain currencies and it strengthened against more of the high beta currencies. The euro was slightly stronger. Swiss was stronger, although the Swiss has turned around this week.
But Aussie was one of the underperformers. And certainly if you look at, you know, micro exposure to AI, obviously the US is by far the most exposed. Japan would also be very exposed.
A very high portion of the top X index is tech related. And Australia as well. From a terms of trade perspective, in terms of energy and materials that would be related to AI.
But also there's been quite a rapid build out in data centers in Australia as well. There's more of that to come. And then, of course, on top of that, it's a high beta G10 currency in a risk off.
It would go down anyway. Yeah. But with an AI exposure on top, it would, I think, definitely be the underperformer or one of the big underperformers.
OK, great. Thank you very much, Derek. I think that's all my questions.
Is there anything that we've missed that we should flag to our listeners? Yeah, I think we've, you know, we've we've covered the main elements. You know, politics in Washington will always be important to watch in this kind of lame duck session to see to see what happens.
But, you know, definitely that kind of feeds into that AI discussion as well. And what can be done in certain states where AI was definitely an issue and how voters voted, what can the Democrats do and how aggressive will they become in terms of slowing down data center build outs, trying to implement greater regulatory controls. So, you know, a regulatory risk premium is definitely part of the story in AI and how that evolves over the next couple of months will be important as well.
Great. OK, fantastic. Thank you very much.
Thanks, James. Have a good weekend. Enjoy the weekend when you get there.
Indeed. Speak soon. Bye.
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