Ahead Today
G3: Eurozone CPI, Canada CPI, Fed Communications blackout
Asia: China macro numbers
Market Highlights
The Dollar and markets more broadly endured a rollercoaster session on Friday into the start of the week, with changing expectations of the new Fed Chair coupled with Trump’s threats of tariffs on European countries on the Greenland issue leading to higher gold prices on Monday.
In particular, President Donald Trump announced a 10% tariff on the Greenland issue, and targeting European countries such as Denmark, Norway, Sweden, France, Germany, the UK, Netherlands and Finland. According to Trump, these tariffs are also set to increase to 25% in June unless a deal is reached for the purchase of Greenland. Suffice to say this announcement was met with strong reactions from European leaders, and in the broader context of the fact that the US-European Union trade agreement has not been officially ratified yet, it raises some risks that trade tensions between US and Europe could be rekindled this year.
Meanwhile, President Trump expressed reluctance about nominating Kevin Hassett as the successor to Fed Chair Powell. Betting markets have now significantly raised the probability of Kevin Warsh becoming the next Fed Chair closer to 55%, and with that Kevin Hassett’s chances in these markets have fallen to 7%.
All these led to a sell-off in risk assets on Friday, as markets digested the chances of changes in Fed policy.
Looking ahead, the key for Asia’s FX and macro markets will include an anticipated announcement later today by Japan’s Prime Minister Sanae Takaichi on a snap election likely to be held on 8 February, coupled with China’s macro numbers out later today. The Bank of Japan’s policy meeting later this week will also be significant in this broader context.
For the Japanese Yen, election uncertainty continues to dominate. The CDP and New Komeito announced a new joint party – the Centrist Reform Alliance – ahead of the general election, aiming to provide a moderate alternative to LDP ahead of the upcoming snap election. While this is unlikely to be a full collaboration and is likely done just for the purposes of the upcoming election, it could nonetheless complicate the path for PM Takaichi to increase the number of seats and get a strong mandate. All these could also mean that an approval of the Budget before the fiscal year ends could take longer than anticipated.
For now, the Japanese Yen faces headwinds from election uncertainty and so we could only get better clarity post February before a clearer trend emerges. Our global team still thinks that over medium term JPY has already been quite weak so far, and our bias is still to see USD/JPY move lower over time, depending on how elections pan out of course.
