Will Trump’s inauguration fuel renewed USD buying ahead of anticipated BoJ rate hike?
The desk anticipates renewed USD buying momentum, particularly in light of potential trade tariffs and policy announcements from the Trump administration. Per the full note from MUFG EMEA, expectations are high for the dollar to gain traction as these developments unfold, especially with a possible Bank of Japan (BoJ) rate hike on the horizon. The current positioning in the FX market suggests that traders are bracing for these shifts, which could further bolster the USD. With no major events on the calendar in the next month, market participants are likely to react strongly to any news from the U.S. administration.
What the desk is arguing
The expectation of renewed USD buying is anchored by potential announcements from the incoming administration, notably trade tariffs under Executive Order. These developments, alongside anticipated stimulus measures, could lead to a more hawkish Fed outlook, further supporting the dollar's ascent.
Additionally, the looming possibility of the Bank of Japan continuing its tightening cycle could offer further contrast to U.S. monetary policy direction. If the BoJ does indeed follow through with another rate hike, this might amplify divergence in central bank policies, favoring a stronger USD against the JPY.
Where it sits in our coverage
Our current consensus target for the USD/JPY stands at 1.075, maintaining a firm spread towards the BoJ's rate outlook and the U.S. fiscal policy implications. This view aligns with our prior assessments anticipating divergence as a key driver in currency valuation in the upcoming months.
Specific firms like Barclays and JPMorgan are echoing this sentiment. Their published targets reflect a bullish outlook on the USD:
Several firms are in alignment with this bullish view on the USD ahead of anticipated changes in monetary policies. For instance, goldman also expresses confidence that the dollar will gain traction against other currencies in the coming weeks.
Conversely, bofa holds a contrary stance, predicting a target of 1.04 for March, suggesting that the market’s expectation for a stronger dollar may be overdone in light of global economic uncertainties.
01USD is expected to strengthen on potential Trump tariffs.
02Anticipation of BoJ rate hike enhances USD/JPY divergence.
03Different views exist on the sustainability of USD gains.
Market implications
A significant move towards USD buying could reshape speculative positioning in FX markets, particularly against JPY. Should trade measures boost economic sentiment, we might see a broader USD rally, impacting risk assets and global trade flows.
Risks to this view
Risks include potential market backlash against aggressive trade policies and geopolitical tensions that may arise from tariff announcements. Additionally, if the BoJ fails to hike rates as anticipated, it could temper USD gains against JPY.
Welcome to the MUFG Global Markets FX Week Ahead Podcast with Derek Helpenny, Head of Research Global Markets EMEA and International Securities. It's Friday 17th January 2025 and joining Derek to pose some questions on the financial market themes for the week ahead is Chris Jakubowski, Director, 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, how are you? Hi, Chris.
Yeah, good, good. And yourself? Yeah, very well, thanks.
Getting back into the groove post-New Year and Christmas, so... Indeed, indeed. Plenty to talk about, though, and there's lots been going on.
So it's been an exciting start to the year, but what do we expect? And we shouldn't expect anything less with Trump coming in. I just think it's going to be volatile throughout his term.
But let's start on that, actually, and let's look at dollar because we've got the inauguration, obviously, coming in. It's a topic of focus, especially with dollar. Dollar's been incredibly big and it's slightly coming off with the expectations that he might be rolling back on some of his tariffs or not going as hard as he first thought.
We also got the soft CPI and PPI this week, which helps. So we're just seeing this move lower in yields and the dollar is softer. What are your thoughts on that?
And do we have legs for it to go much longer? Have we seen peak yields and peak dollar now? Are we on a downtrend?
What are your thoughts there? Yeah, like Monday's obviously massively important. I think for at least a couple of days, maybe the macro will move a little bit to the sidelines.
So the type of drivers for this week, you mentioned, obviously, the weaker CPI, which has helped correct treasury yields lower. That could take a backseat, obviously, in the first part of next week. It's hard to know precisely where the market is positioned for next week.
But I think we can generally agree that, you know, given the scale of the moves that we've had, and I mean, you know, over the last, essentially, the fourth quarter, you know, the dollar, in terms of the Fed's trade weighted index for advanced economies, the dollar jumped 7.7% in the fourth quarter. That was the biggest gain since the first quarter of 2015, when we had quantitative easing kicking off in Europe. So a really, really big move.
So I think the bar is pretty high in terms of where expectations are for next week. Now, there's been so many different promises, and, you know, essentially 100 executive orders could be pretty much signed possibly in as soon as the first 24 hours. You know, Biden did 17 executive orders on day one.
He did 37 executive orders in his first week in office. So, you know, no doubt Trump is going to way surpass that. That 100 executive orders could well pan out to be correct.
For the markets, and for FX in particular, you know, border measures, other kind of domestic measures, deportations, immigration, climate change, pushing back on what the Trump administration would call, you know, wokeness across different areas of the US economy. But all of that will be part of what comes very quickly. But obviously, it's going to be the trade terms in particular that the markets will be looking out for.
Yeah, go ahead. I was just gonna say, don't you think like, I don't know, from my perspective, I think, you know, the market is very positioned along dollar it feels still. And I think like, it was like he was coming out with very, very strong rhetoric and out there and within the campaign, I just, me personally, I'd be interested in your thoughts.
I just feel that surely, there's just going to be, you know, there's going to be some unwind of that. And I can't think that even though if he's going to do executive orders, you know, in reality, are they going to be as provocative as what his, you know, his sort of manifesto and his, you know, his whole sort of, you know, all his, you know, campaign into becoming president? I mean, I think it's going to be soft.
What do you think? Yeah, like, I think, every time there's been like, you may remember a couple of weeks ago, we had that Washington Post article where there was a suggestion that he was going to be taking a softer approach on tariffs. He was on social media within, you know, 12 hours going, that's rubbish.
I think he's going to be pretty aggressive. Now, there's ways in which you can do this. Like, for example, section 232, section 301, were two of the avenues that he used to implement tariffs in his first term in office.
But those involve announcements, investigations, conclusions, and then the implementation of tariffs. So it's quite a long process. What he might do on this occasion is go down the avenue of using the International Emergency Economic Powers Act.
And that gives him much freer reign to implement tariffs much more quickly. And he did threaten to use that act against Mexico in relation to the border. So I would imagine he's going to do that.
And he's going to focus initially perhaps on China, Mexico, Canada. And he'll take action in the first 24 hours and indicate that there's more to come. Now, you may argue, and you could be right, Chris, that maybe that in itself, because it's not a broad-based tariff on all countries, which I think he'll avoid, then yeah, maybe the dollar will come back a bit.
Because of course, the dollar is up nearly 10%. So that effectively counters a global 10% tariff everywhere. So there is a lot priced.
And maybe you might get a knee-jerk correction, correction lower, but I still doubt it would be sustained. And I still think he'll do enough to keep the markets thinking there's more to come. He's going to be pretty aggressive.
And that gives the dollar a bit more scope to go stronger. But I would certainly agree with the view that the big move for the dollar is behind us, as I said, nearly 10%. We can go more.
And we think we probably will. And we think euro-dollar would probably break below parity, which is not a big call given we're trading at 103%. But our end quarter forecast is below parity.
We could go even lower in Q2. And then I think later, going towards the end of Q2 into the second half of the year, that's when we think the dollar then starts worse on a number of different factors. Okay.
So how much more do you think it can actually go then from where we are now, higher? 3%, 4%, 5%? Yeah, I think, yeah. Presumably.
So we've got 99 for euro at the end of this quarter. So we obviously could go lower than that before the end of the quarter or at some point in Q2. But already, when you look at things like, for example, real yields in the US, the dollar looks to have overextended when you track data over the last two years.
When you look at the spread against Europe, in actual fact, the market has taken out some of the cuts from the ECB. So the spread has moved in favor of Europe. So, you know, you still need certain dynamics to come back into play to push the dollar stronger further from here.
And there is that scope of the short term. Like I do think we could, for example, get a bit of a post-election bounce. You know, the payrolls report last week, for example, you know, maybe small and medium-sized firms were holding back election uncertainty.
Small and medium-sized firms love Trump. So maybe we're going to get a bit of a bounce over the next couple of months. But I think that the longer term cyclical factors, which, you know, in terms of the monetary stance is still restrictive, that's going to curtail credit.
It's going to, you know, weigh on consumer spending over time. You know, then the cyclical forces come into play. And then that's when the dollar starts to weaken as the economy weakens later in the year.
Yeah. OK, great. And let's move on from there.
But on this, keep on the topic of yields has been, you know, always talking about U.S. T-yields just, you know, ripping higher. But obviously, another one, the one just across on our own homeland, we've had gilts that have just, you know, nearly in the 10s, they've nearly broken 5 percent themselves.
You know, on the back of this fiscal narrative around labor and their mismanagement and the rest of it. But, you know, it seems like the market has taken a little bit of respite from the current situations, you know, with us basically ending the week about 60 basis points lower in the 10s. That seems to be sort of, you know, it's sorted itself out somewhat because we, you know, this week we got the CPI, we got the PPI, which was softer, which, you know, they must have loved to give us a bit of breathing room for Reeves.
We then get GDP that comes in and it's, you know, it's not great, but it's growth. And then retail sales today, we get terrible. But then we get IMF news today as well that, you know, GDP in the U.K. is going to outpace, you know, Europe, Germany and France and the rest of it.
And, you know, it's going to be only the U.S. and U.K., the nations that are in the GCM that get upgrades, you know. So it's kind of like a mixed bag. But it feels to me, we've spoken about this before, that there's just such a negative narrative around the U.K. and the government and what they're currently doing, you know.
And what, you know, I guess, what are your thoughts on that? Are you sort of the same thinking as, you know, the markets where, you know, they've got real, there's real fiscal problems here and we could, you know, we're going to get another blowout in yields and we're in real trouble? Or is this just transitory sort of economics, which we're coming through and it should, there should be some sort of prudent, like, labour, you know, policy coming through that will hold the markets and they'll get growth in the end and it will sort itself out and it will be OK.
Where do you sit on the spectrum of what has happened this week in Stirling? Yeah, like, I just don't buy the whole debt crisis, Liz Trust crisis that's coming back again and something similar. I just, I don't, I don't see it happening.
Like, from a, from a Labour government perspective, you know, for supply concerns to worsen and to maybe elevate the risks of some kind of debt supply crisis concerns, you'd have to imagine that the government would be slipping towards a breach of the self-imposed fiscal rules. But Rachel Reeves was very, very clear this week. They're not going to do that.
If it comes to us, they'll, they'll cut government spending. And while they promised the electorate that there wouldn't be fiscal austerity, if there's a choice between that and a breach of the fiscal rules, the Labour government have been very clear which one they'll take. So from a market skills perspective, that should certainly reassure investors.
And then the second important theme in why I think the UK has got a bit more focus is, of course, inflation has been stickier in the UK. Service inflation came out much weaker than expected. That's been the sticky component that the Bank of England have been concerned about. 4.4%.
The Bank of England was expecting 4.7%. And then our own view going forward over the next couple of months. Now, I accept that a crisis can happen in a couple of days.
The risk was always there that that could happen. But ultimately, the macro outlook we felt, in particular in relation to the labour market, was going to point towards wage inflation easing further, because labour demand based on the PAYE employment statistics, clearly decelerating. And ultimately, that is going to help to, to ease wage inflation concerns as well.
So I think, you know, the Bank of England will have scope, better scope for cutting rates going forward. And that ultimately will help the gilt market as well. So, so yeah, Chris, I've been a bit dubious about this.
I do get the, I'm sure you agree living here in the UK, you know, the media love a crisis. They've been talking up the guilt crisis, since basically Giltian started to jump higher in the fourth quarter of last year, which of course, we know, was very much US Treasury year driven and expectations about Trump and his policies. Yeah.
I mean, in itself as well, it's just it's rather frustrating, because it is kind of self fulfilling as well, because I was speaking to someone yesterday, just more who is a builder and does landscaping and stuff. And he's he has noticed since all this negative press, and you know, all this bad, all of them not being able to manage the communications. Well, people have just people have stopped sort of spending a bit.
But what are your thoughts on this off the retail sales? Do you think that is just do you think I mean, it's a very volatile data set anyway, but do you think that do you think that's something of concern, like given the fact that it came off so much? Or do you just think, you know, people are actually a little bit concerned about what's going on because of the given the press and and the rest of it?
Or? Yeah, that's where it starts actually going into the real economics, right? When when, you know, that there is actual concern that the news stories actually turn into real concern.
Yeah, like the household sector, clearly is remains cautious, if you like, you know, real, real incomes are growing again. But that's definitely not translating yet into increasing consumer spending. But so that what that implies is that UK consumers are are saving more.
Now, you know, fourth quarter retail sales, because obviously, November, December can be quite volatile, as you said. But if you take fourth quarter as a whole, retail sales declined by 0.8%. So, you know, in the middle of that was, of course, the budget and all the negative news around that, in terms of the government preparing households and the markets for it, and then the actual impact afterwards.
So maybe we just need to move a little bit away from that, you know, we, in my view, we have relative political stability, certainly a lot better than what we had. Power, maybe just as we move a little bit further away from the budget, companies, you know, I guess, manage what they have to do. You know, then I think we could we could see some better consumption growth later in the year as inflation starts to subside again.
Yeah, I mean, simple, simple economics, but if you know, the consumer price is growing, that's, you know, whether they're saving or spending, not, you know, if it's not spending yet, they will be able to in the future. And, and that's the sort of the real economics that can, you know, have a huge boost to it longer term. So, yeah, I agree.
Right. In the interest of time, let's move on. Obviously, I can't let you go away yet again with without us talking about the BOJ, which is upcoming.
It's now a big focal point again, given that it's very much on the table again. You know, this week, we're down a nice amount in dollar yen, like two big figs, about 1% with the BOJ looming large. It's like, you know, it's very much in play.
I mean, and I think the only thing that can derail it, and I know you're this is of your thinking as well, is Trump, you know, and whether there's any real volatility, and they've been quite vocal on that as well. But, you know, inflation expectations up, wage negotiations, you know, well received, you know, the market's pricing a hike, you know, where are you is, you know, what's your probability on them hiking next week? And what are your thoughts?
Yeah, yeah. Like a week ago, you know, we said a BOJ rate hike was was still definitely on the cards for January. And we we mentioned that, you know, the BOJ had a bit of work to do to kind of bring the markets around because they didn't want to hike without the markets much more anticipating it than what they were a week ago.
And we've had that this week, you know, we had the scheduled speech from Deputy Governor Jimeno. And then we had a an unscheduled or a last minute scheduled speech by Governor Ueda the following day. And they both acknowledged that a discussion would take place next week to hike rates, whether to hike rates or not.
And they were both very clear that the recent regional BOJ regional managers meeting had revealed positive information in relation to wages going forward. And I think they both used that as a piece of new information to argue for the potential for a rate hike next week. And yeah, I think now it's 90% priced, we're not going to miss that opportunity.
And I think it's, it's near, it's near on a done deal, obviously, Trump on Monday, and what happens if there was a big equity market correction? And, you know, there was a lot of volatility, maybe not, but I, I can't see that happening. Whatever Trump does, it can't be that much.
Yeah, it's anticipated to some degree. So I think you'd have to get some real big surprises for the BOJ not to hike now. On Friday, I think it's quite positioned quite well positioned.
Yeah, I don't think we're going to get a big move either. It would have to be something that completely derailed like expectations of US economic stability, right? And that would probably only derail that, you know, they're thinking of hiking from my perspective.
Yeah, yeah. And that's, that's, that's just not going to happen next week, in the space of a few days. So I think, I think it's, it's pretty clear options market suggests, as I said, that, you know, the positioning is like vol one week, vol did, did spike today, as you'd expect, but risk reversals haven't really moved very much.
So it does look like the market is reasonably well positioned for, for the hike next week, as I said, and I certainly don't expect what happened in July, August, when we had that huge, huge move. Yeah, it's going to be more like March when they hiked rates last year for the first time. Yeah, that was, was a lot less.
And then as the market's pricey about another one, do you still agree with vol one more this year? Yeah, like guidance next week will be important as well, obviously, for the way in which the markets react. I'm guessing it'll be broadly similar in terms of the continuation of, well, we'll assess the economic data that continues to point to price stability, there's scope for a bit more, but, you know, he'd at least acknowledge that, you know, we're, we're progressing towards the lower bound of what might be a neutral race, but that we're not there yet.
So that gives the market that sense of, okay, we've, we've done some, we've got a bit more to do, but, you know, not, not a, not a whole lot. And I think that kind of guidance will, will help again to kind of limit any kind of reaction. Yeah.
Agree. Well, that was very helpful indeed, Derek. Thanks very much for your insights next week.
And look forward to catching up next time. Indeed. Yes.
Thanks, Chris. Have a good weekend. And yourself.
So talk next week. Cheers. Cheers.
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