Easing of “debasement” fears helps USD to rebound

USD: Commodity currencies correct lower as “debasement” fears ease

The US dollar has continued to rebound during the Asian trading session after it was confirmed at the end of last week that President Trump will nominate former Fed Governor Kevin Warsh to be the next Fed Chair. It has triggered a partial reversal of the US dollar sell-off at the start of this year triggered by heightened US policy uncertainty. The dollar index has risen back above the 97.000-level overnight moving further above the low of 95.551 recorded on 27^th January. The worst performing G10 currencies overnight have been the Australian and New Zealand dollars and the Norwegian krone. Weakness in those currencies has been reinforced by the sharp correction lower in commodity prices particularly in precious metals. The price of silver has continued to collapse after hitting a record high of USD121.65/ounze on 29^th January. It has fallen by around a further -14% overnight taking its cumulative decline since Friday to almost 40%. Similarly, the price of gold has fallen sharply by  round 20% from its recent record high. The sell-off has also spread to other important commodity prices including copper and oil. The price of oil and copper have both fallen by over 5%. The correction lower for the price of oil after Brent rose back above USD70/barrel at the end of last week likely reflects some initial relief that President Trump did not order military attacks in Iran over the weekend. President Trump told reporters that “lots of things” are happening with Iran, adding that the country is currently talking with the US. He stated that “I hope they negotiate something that is acceptable” while warning “we have very big powerful ships heading in that direction”. The Trump administration is increasing pressure on Iran to negotiate a new nuclear deal.  The price of oil had already risen by over USD10/barrel at the start of this to reflect more unease over the risk of supply disruption.   

The broader sell-off in commodity prices including in precious metals and copper likely reflects an unwind of crowded speculative positions. The price of silver had surged higher by an annualized rate of over 1000% annualized in recent months which is hard to justify by fundamentals. The sell-off will also be viewed as a reversal of “debasement trades” after President Trump’s nomination to be the next Fed Chair Kevin Warsh should help to ease investor concerns over threats to the Fed’s monetary policy independence. He is a credible candidate to be the next Fed Chair who has previously worked as a governor. It has helped the US dollar to rebound as the risk premium priced in recently has been scaled back. He has also repeatedly criticised the Fed over its balance sheet policy and is expected to push for a smaller balance sheet in the future. Fears over a tightening of liquidity conditions in the coming years could be triggering an unwind of speculative positions in the near-term as well. However, we still expect the new Fed Chair to push for lower rates once appointed. It is unlikely President Trump would have picked Kevin Warsh if he did not share a preference for lower rates at least initially, and in recent public comments Kevin Warsh has called on the Fed to lower rates highlighting stronger productivity growth which gives the US economy more room to grow without creating inflation pressures. It supports our view that the US dollar will continue to weaken this year with the rebound in recent days likely to be short-lived.     

COMMODITY FX CORRECTS LOWER AFTER STRONG START TO 2026

Source: Bloomberg, Macrobond & MUFG GMR

JPY: Opinion poll points to strong showing for ruling coalition weighing on yen

The yen is surprisingly little changed amidst risk-off trading conditions overnight. USD/JPY briefly rose back above the 155.00-level overnight hitting a high of 155.51 as it moves further above the low from last week of 152.10. The yen initially weakened at the start of this week after a weekend opinion poll from the Asahi Shimbun revealed that the ruling LDP and Japan Innovation Party is on course to secure a landslide victory in the 8^th February election, while the opposition Centrist Reform Alliance is projected to lose more than half of the seats it held before Prime Minister Sanae Takaichi dissolved the Lower House.  The survey revealed that the ruling bloc could win more than 300 of the Lower Houses 465 seats, and even secure a two thirds majority. Such a margin would allow it to override the Upper House by repassing legislation rejected by the Upper House where it lacks a majority. The breakdown of the results revealed that the LDP is expected to win more than 210 single-seat districts on its own up from 138 it held before the Lower House was dissolved, and surpass the 60 seats it won through proportional representation in the October 2024 general election. If the ruling coalition were to perform as well as suggested by the Asahi Shimbun survey, it would give Prime Minister Takaichi a strong mandate to continue with her reflationist policy agenda encouraging a weaker yen.

At the same time, the summary from the BoJ’s latest policy meeting from  23^rd January was released overnight indicating a growing awareness of the need to raise rates in a timely fashion as they monitor the impact of the weak yen on inflation. One of the board members noted “given that addressing rising prices is an urgent priority in Japan, the bank should not take too much time in examining the impact of raising the policy interest rate, and should proceed with the next step, a rate hike, without missing the appropriate timing”. The number of times “a weak yen” and “foreign exchange” appeared in the summary doubled according to Bloomberg. One member stated “the depreciation of the yen and the rise in long-term interest rates largely reflect fundamentals, such as inflation expectations. In this situation, the only prescription from the monetary policy side is to raise the policy interest rate in a timely and appropriate manner”. The comments will reinforce expectations for the BoJ to deliver another rate hike as soon as the April policy meeting which is helping to provide some support for the yen but is not sufficient to reverse the weakening trend.   

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Source: Bloomberg & Investing.com