A weaker JPY heading into Lower House election

USD/JPY: Position liquidation & weak US labour market data in focus

The yen has continued to trade on a weaker footing ahead of this weekend’s Lower House election in anticipation that Prime Minister Takaichi’s decision to call a snap election will pay off and strengthen her grip on power in Japan. Short yen positions have not yet been caught up in the broad-based position liquidation that been taking place in other popular trades at the start of this year. The sharp correction lower in precious metals and cryptocurrencies has started to spill-over into global equity markets at the end of this week triggering more risk-off trading conditions heading into the weekend. The sell-off has been most evident in US tech stocks with the Nasdaq index falling to its lowest level since November overnight, and extending its decline since last month’s peak to just over 6%. The scale of the sell-off has been much smaller though than in speculative assets such as silver and Bitcoin which have fallen by around 40% and 50% respectively from record highs. President Trump’s decision to nominate former Fed Governor Kevin Warsh has helped the US dollar to rebound this week and reinforced the sell-off in speculative assets. His hawkish past reputation and criticism of the Fed’s expansionist balance sheet policy have created more unease over whether loose liquidity conditions will continue in the coming years.    

At the same time, the release yesterday of the weaker than expected Challenger job and JOLTS labour market reports have added to concerns over the health of the US labour market. The latest Challenger report revealed that job cuts jumped to 108,435 in January up from 35,553 in December. It was the highest amount for any January since the Global Financial Crisis in 2009. However, the breakdown revealed that nearly half of all announced jobs losses came from just three companies, UPS, Amazon and Dow. It should help to ease fears that a more broad-based wave of job losses in underway. At the same time, the latest JOLTS report revealed that job openings dropped sharply by 386k to 6.54 million in December and the November figure was revised down as well. It was the lowest reading for job openings since September 2020 during the initial re-opening from COVID lockdowns. It provides further evidence that labour demand remains weak despite solid economic growth in the US. It will add to concerns that the roll out of AI is making firms cautious over hiring new workers alongside heightened policy uncertainty. Overall, the US still appears to be a low  hiring, low firing economy but the reports will create doubts that the Fed was premature to conclude at the latest FOMC meeting that downside risks for the labour market have eased. The reports support our view that weak labour demand will keep pressure on the Fed to lower rates further this year under the new Fed chair, and support our forecasts for further US dollar weakness (click here). Due to the short-lived US government shutdown at the start of this month, the release of the January nonfarm payrolls report has been delayed until next week on 11^th February.                  

SHARP DROP IN JOB OPENINGS POINTS TO WEAK US LABOUR DEMAND

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Dovish BoE policy hold & rising UK political risks hit hard

The pound has weakened sharply over the last couple of trading days. After closing below support from the 200-day moving average at the start of this week for the first time since  April of last year and hitting a low of 0.8613, EUR/GBP jumped to a high yesterday of 0.8721. The abrupt reversal of the pound strengthening trend that had been in place since late last year was triggered both by the dovish repricing of BoE rate cut expectations and the return of political risk in the UK.

The UK rate market has moved to price back in more rate cuts from the BoE after yesterday’s MPC meeting. The timing of the next BoE rate cut has been brought forward to the next MPC meeting in March. The UK rate market has moved to price in around 16bps of cuts by March which compares to only around 5bps of cuts that was priced in prior to yesterday’s MPC meeting. The dovish repricing was triggered by the surprisingly close decision to leave rates on hold yesterday by a 5-4 vote. Furthermore, comments from Governor Andrew Bailey and MPC member Katherine Mann, who voted to leave rates on hold, indicated that they could vote for a rate cut at upcoming policy meetings. Governor Bailey stated that “I think going into March, 50-50 is not a bad place to be. In a sense, markets are asking themselves the same question that I’m asking, or perhaps they’re just working out what question I’m asking”. The dovish change in forward guidance from the BoE reflects less concern over persistent inflation risks. The BoE’s forecasts for inflation and growth were both lowered, and the unemployment rate forecast raised. We are currently forecasting (click here) two more cuts this year but can’t rule out a third later this year.

At the same time, the pound has come under renewed selling pressure on the back of fresh concerns over the political risks in the UK. Keir Starmer’s position as prime minister is under greater scrutiny again triggered by the latest revelations from the Epstein scandal. His past decision to appoint Peter Mandelson as the UK Ambassador to the United States is coming back to haunt him. According to the local media, potential leadership challenger Angela Rayner, former Deputy PM, is reportedly “ready” to launch a leadership campaign which adds to downside risks for the pound.                   

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com