US dollar gains unlikely to be sustained

Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halperni, Head of Research, Global Markets EMEA and International Securities. It's Friday, 19th September 2025, and joining Derek to pose some questions on the financial market themes for the week ahead is Chris Jakubowski, Head of Hedge Fund, 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. Hello, Derek. Hi, Chris.

How are you? Yeah, I'm very well, thanks. How about yourself?

Yeah, not too bad, not too bad. Podcast time always means it's Friday. It does, yeah, which is nice.

We're nearly there at the weekend. So, BOJ, unchanged, but we had a split vote. What are your takeaways from what happened?

Yeah, like there were two hawkish elements, I guess. The descent, which you've just mentioned, and then I guess the balance sheet changes in terms of starting to sell ETFs and JREITs. On the descent, like Takata and Tamura, definitely the two hawkish or most hawkish members of the policy committee.

So, in that context, not a huge surprise. But yeah, the markets weren't expecting two descents. I've had a look back, and from what I can see, in terms of two dissenters on the hawkish side, going back to 2000, I couldn't find one.

I can't say with 100% certainty, but I think this is the first time. So, in that sense, it is pretty meaningful. And then the ETF announcement to start selling off the balance sheet.

Again, maybe a bit of a surprise, although there was a Reuters story out that was being considered. So, again, that wasn't a huge surprise. If you consider the BOJ had just finished selling its equity holdings, turning to ETFs and JREITs was the next natural step.

But as has been highlighted by Governor Ueda and other calculations, that's $620 billion per year on a market value ETF holding of nearly $77 trillion. You're talking 124 years. So, the pace is marginal.

It doesn't really have much impact, although there was a bit of a sell-off in equities on Black Bush, but it wasn't significant. So, yeah, the market reacted by sort of on the hawkish elements. I think 13 base points now priced for October.

It jumped some 8.5 basis points yesterday. What are your thoughts on when they might go? I mean, you know, he was going on about uncertainties in sort of trade and really trying to sort of keep that alive and kick the can down the road, it felt a bit.

It kind of feels like it's running a little bit thin with the current sort of context globally. It feels like trade concerns somewhat dwindling. Do you think he's buying a bit of time?

And was the market right to really price it much more in October? What are your thoughts? When are they next going to hike?

Well, October has been our call for a while. So, we're inclined to stick with that. The OAS reaction was more to the descents than anything else because certainly the press conferences, you've implied, Chris, he was pretty cautious and there was nothing for the markets to latch on to, to say, oh, they're more seriously considering it.

But, you know, I think the most important point to make here is that ultimately, Governor Ueda was in a bit of a bind because let's say he wanted to signal the increased prospects of a hike at the next meeting. Of course, the big elephant in the room is we have a leadership election on the 4th of October and we could have Takaichi as the new prime minister and suddenly then the plan to hike on the 30th of October could be certainly up in the air. And I think in that sense, Ueda was nearly forced into just kind of repeating more of the same.

Yeah. And, you know, a holding pattern and then see obviously what happens on the 4th of October. But, you know, our own view is that we could still be in a situation where the BOJ could be in a position to hike at that meeting.

Yeah, definitely. Definitely. I mean, the election is certainly one that will sort of weigh on them.

But what about, there's also the tanking coming up and the branch managers survey. Do you think, are you looking at them at all or do you really think that it's a green light for October and as long as nothing really, you know, happens hugely on the LDP leadership election? Yeah, like interestingly, the one element of change in the statement was the reference to downward pressure on corporate profits in the manufacturing sector because of tariffs.

And indeed, if you look at the tanking, even from the last tanking, the corporate profits reading for the manufacturing sector minus 8.2% was actually the weakest since COVID. So there is some evidence there. And in the non-manufacturing, while it did drop as well, we're not at those kind of levels.

So there does look to be increased pressure on the manufacturing sector relative to the non-manufacturing sector. And I think if that was borne out more in the October tanking, well then, yeah, it could put some doubt on that decision. But I think the politics is more important.

And I think ultimately, as you've implied, again, the global backdrop, you know, to be fretting about uncertainty is when you've got equity markets in the US and in a lot of markets globally at record highs, it starts to become a little bit unbelievable and lacks credibility. And I think, again, I go back to what I said in terms of probably just wanting to wait and see. On that, on the tanking, just quickly, I mean, there was certainly more global uncertainty there then.

Do you think, do they incorporate that sort of global uncertainty? I don't fully understand how that survey is actually done. Would they incorporate sort of global uncertainties in their manufacturing report as well?

Is it purely a survey on sort of how they feel the outlook will be or is it a little bit more? Yes. And obviously, from a tariff perspective for the manufacturing sector, it's far more exposed to international markets than on manufacturing.

So definitely, yeah, you definitely could see an improvement. At least now there's clarity. Yes. 15% tariffs better than a 25% tariff.

So and again, Governor Wade did acknowledge that today. He said that those risks related specifically to tariffs are not as significant as they were before. Cool.

Yeah. I mean, still dollar yen is 40 pips higher. So, you know, it probably hasn't worked out, especially when you think about it, just on the face of it, that the Fed did cut.

I just quickly on that point. I mean, they did cut, but we all appreciate there are sort of a hawkish undercurrent there. Or maybe it just wasn't, they didn't live quite up to the dubbish expectations the market was looking for.

What's your take on sort of the dollar yen ending the week 40 pips higher where we started on Monday? Definitely the latter of what you've just said there, Chris. In actual fact, we've done our, we do text analysis after central bank meetings and our text analysis on the statement and the communications from Powell in the press conference gave us a more hawkish, or sorry, a more dubbish interpretation.

So it's definitely down to the fact that, and I said this before the FOMC meeting, it was going to be very difficult for the Fed to outdub the market pricing. And that's ultimately what happened. And that's why I think we've had this bounce.

But I'd be very wary of this becoming sustained because, as I said, there was a dubbish interpretation in terms of analysing the communication specifically. And I just don't think anything has changed. The labour market is weakening.

If anything, I think there's a greater probability of the curve being underpriced for what they might deliver just this year, because if we continue to see a worsening of the labour market, the markets at some point are going to start considering 50 at either, probably at the December meeting. So we're still five basis points short of just two consecutive 25 basis point cuts. So if the labour market worsens, the markets will be pricing in more quite quickly.

And I think that's a bigger risk than the markets going the other way, that there's too much easing priced for over the next couple of meetings. So, yeah, we still stick to our view. I can understand why the dollar has bounced a bit because of what I've just said.

But ultimately, it's not going to get sustained unless there's significant reason to question the extent of easing in the curve. Yeah, that makes sense. Moving back to Japan then, I think we have to touch on what we briefly did at the beginning, which was the presidential leadership elections for the LDP.

Just give us a brief update on what the current state's play is and who are the front runners and what that means. Yeah, so we had actually Sanae Takeuchi announced her kind of policy platform details today. Interestingly, didn't mention the BOJ.

It was just the fiscal elements, but certainly she's pushing for fiscal expansion. And, you know, really, I think it's Hayashi, Motegi, Kobayashi, Takeuchi, Koizumi. It's going to be Koizumi and Takeuchi.

I think they're the front runners. We've had some polling. We had a Gigi Press poll released yesterday.

Amongst the general public, Koizumi 23.8% and Takeuchi 21%. The next best were Hayashi and Motegi at just 5.9%. So they're way out.

Kyoto News last week, Takeuchi 28%, Koizumi 22.5%. But then interestingly, just with LDP supporters, the Kyoto News poll, Koizumi 36%, Takeuchi 15.7%. So as you may know, the first round of voting on the 4th of October, 50%, 295 votes will be the LDP lawmakers.

And another 295 votes will be given to the LDP membership across the country, around a million people. So it's 50% the LDP lawmakers and 50% grassroots. And based on that, LDP supporter Koizumi 36%, he's definitely going to get through to a runoff.

And I think most likely, obviously, against Takeuchi. The second round then would be just the LDP lawmakers and the 47 representatives from each prefecture. So it becomes much more weighted to the LDP lawmakers for the second round of voting.

And then it comes down to factional politics. Aso, Kishida, who are they going to pitch for? They've been a bit quiet on that.

But one interesting point to mention, Chris, former Prime Minister Suga is quite close to the leader of Isshin, which is the third largest party. And there is chatter of the potential for a coalition between the LDP, Nekomato and Isshin to kind of bring about a more stable coalition. Suga is backing Koizumi.

And therefore, there's a belief that perhaps Koizumi as leader is a better way of getting a broader coalition that brings about political stability. Now, that might not happen. You know, it's kind of still, I guess, just an idea and speculation.

But that could be another way in which Koizumi amongst the lawmakers is seen as somebody better positioned. And then I think very quickly, Takeuchi's policies, very Abenomics-like. Is that not from the past?

Are we not through that bottle? Isn't inflation now the problem because of how bad the LDP did? And in that sense, that could work against Takeuchi as well, especially given the vulnerability of the JGP market at the moment.

So on dates that I have, I don't know if they're correct, but we will have the candidate announcement on the 22nd of September. And then on the 4th of October, we'd have the leadership election result. Or would that be what you were talking about, the different elements within that?

We would know for certain at that point, the 4th of October. So then after that is what you were discussing there about the potential strengthening of the coalition. That would then be a snap election after that.

It doesn't necessarily have to go to a general election. They could do it once the new leader is in place. It's certainly a possibility.

A general election is also a possibility. But why would the LDP be rushing to do that when they've just done so badly in the upper house election? So, you know, I wouldn't necessarily expect a general election.

Although previously when you've had leadership elections, that does often follow. So it's a little bit unclear. But to have that coalition with Isshin, they have 38 seats, I believe, in the lower house.

As I said, third largest party. So, you know, it's one way to bring about greater political stability over the near term. So, yeah, the 22nd is Monday.

That's the official basic launch of the campaigning. Yeah. OK, that's great.

Yes, certainly there's political uncertainty everywhere at the minute. And I think in actual fact, we have a call next week on political risk implications for the global markets. That's right.

Thursday the 25th. That's right. Lee's covering that.

So anyone who's listening, who wants to get some details on that, then get in touch with yourselves. Contact and they'll be able to forward that to you. But with that, I think we're probably done for the week unless you've got anything to add.

No, I think, you know, ultimately dollars should weaken. We still haven't changed our view. And dollar yen after a Kozumi victory and a potential hike on the 30th of October.

That all plays into dollar yen going lower. But we need to get, you know, the three month spread is your proxy for the cost of hedging, which is quite important for Japanese investors. You often do hedging on a three, six month rolling basis.

So in a way, you need to get the Fed cuts delivered. To get the three month spreads coming down and hedging becoming cheaper. And as that starts to come down more following, you know, obviously two more cuts this year, hopefully, you know, the dynamic will start to change pretty quickly and be much more supportive of lower dollar yen.

Yeah, I agree. That's great. Thanks very much, Derek.

Thanks, Chris. Cheers. Bye bye.

Thank you for listening to this MUFG Global Markets podcast. Please rate, review and subscribe to our podcast. Contact your MUFG sales rep for more information.

Come back next week for more insights from the Global Markets Research Team.