Ahead Today
G3: US NAHB Housing Market Index, Germany CPI
Asia: Malaysia GDP
Market Highlights
The Dollar was overall stronger overnight, with EUR/USD moving towards the 1.16 levels, while the likes of CNH and to some extent JPY were relatively more resilient to some extent against the Dollar move. US front end rates also rose somewhat with a slightly flatter curve.
Driving these market movements likely includes the stronger than expected US initial jobless claims numbers coming in at 198k from 207k the previous week. Meanwhile, several Fed officials speaking overnight signalled a willingness to pause interest-rate cuts at their upcoming policy meeting, citing a labour market that appears to be stabilising and ongoing inflation pressures. These Fed officials include Chicago Fed President Goolsbee who said that the most important thing is to get inflation back to 2%, while some Fed officials who supported recent rate cuts also backed a pause in rates, including San Franciso Fed President Mary Daly and Philadelphia Fed President Anna Paulson. Overall the path forward will be data dependent and our view is that the US labour market will show increasing signs of softening moving forward, and as such the bias from our end is to see US front end rates come off over time with a steeper yield curve as the data helps to validates our expectation through 2026.
The important development is not just global, but also local, and helping to drive divergence across several Asian currencies.
The Chinese Yuan and with that CNH as well is one where the FX has remained very resilient through the start of 2026 despite the near-term strength in the Dollar, and has also moved against other Asian currencies such as the weakness in the Japanese Yen and South Korean won. A revaluation in Chinese-linked assets, stronger FX conversion by Chinese exporters, and perhaps some positive seasonality may explain the strength in the RMB, and in line with our view. The important development in China was a signal by the PBoC that it has room to further reduce interest rates and reserve ratio requirements to support the economy. The PBoC announced a lowering of interest rates on is structural monetary policy tools by 0.25%, reducing the one-year rate for various relending facilities to 1.25% from 1.50% previously. Overall, we think the trend is for USD/CNY to move towards the 6.90 to 6.80 levels over time, and near-term bounce in the pair perhaps driven by seasonality will likely be an opportunity to sell based on the trend as such.
Meanwhile, the Japanese Yen and South Korean won have been weak so far –driven by different factors but of course both are highly correlated currencies. For the Japanese Yen, uncertainty around a possible snap election continues to dominate and with that the path for the extent of expansionary fiscal and reflationary policies. Yesterday, Japan’s largest opposition party the Constitutional Democratic Party of Japan and New Komeito agreed to form a new party, adding some risk to PM Sanae Takaichi’s anticipated calling for a snap election later this month and possibly on 8 Feb 2026. The weak Japanese Yen is causing some concerns from the Bank of Japan based on latest news, with BOJ officials seeing the JPY as a factor with greater influence on inflation moving forward.
For the South Korean won, the weakness has been driven by continued strong resident domestic outflows, including by retail investors. This comes despite the more hawkish tone from the Bank of Korea’s policy decision yesterday, where the BOK held rates but also removed forward guidance around future rate cuts, while now 5 out of 6 BOK board members see a rate hold over the next 3 months compared with 3 members previously.
While in the near-term election uncertainty is dominating JPY, we think further BOJ rate hikes coupled with some resolution in election uncertainty and clarity on fiscal policy should support JPY moving forward. Meanwhile, the memory chip and export cycle should help offset to resident outflows in KRW over 2026. We as such see JPY and KRW strengthening against CNH over time, putting aside the Dollar view
