Verbal intervention helps to dampen yen sell-off

JPY: Japan steps up verbal intervention as USD/JPY moves closer to 160.00

The major foreign exchange rates have remained relatively stable overnight. The yen was supported yesterday by verbal intervention from Japan after USD/JPY hit a high of 159.45. Finance Minister Satsuki Katayama told reporters that “we won’t rule out any means and will respond to moves that are excessive, including those that are speculative”. She added that “we’ve mentioned this to the prime minister today as well”. The yen sell-off on 9^th January triggered by media reports that Prime Minister Takaichi was planning to call a snap election was singled out by Finance Minister Katayama who stated that “kind of sudden moves…have nothing to do with fundamentals, and are deeply concerning”. A message which was then quickly backed up by Japan’s chief currency official Atsushi Mimura who stated that he was “deeply concerned” about recent FX moves which have been one-sided and sudden. He warned that Japan will “take an appropriate response against speculative moves”. Overall, the comments mark another step up in verbal intervention and increase the likelihood of Japan intervening directly again to support the yen if it continues to weaken ahead of a snap election which is expected to be held on 8^th February. A break above 160.00 for USD/JPY or the high from July 2024 at 161.95 are viewed as two important potential lines in the sand. 

However, the current backdrop is challenging for Japan to turn the yen selling tide through intervention. Market participants remain concerned over fiscal risks related to Prime Minister Takaichi’s policies which are unlikely to diminish in the near-term, and the Fed is expected to leave rates on hold until the new Fed Chair is likely to be in place by June. One potential risk that could trigger an unwind of short yen positions would be if Prime Minister Takaichi’s decision to call a snap election backfires, and it fails to strengthen the LDP’s and her grip on power in Japan. Bloomberg has reported that leaders of the largest opposition party in Japan, the Constitutional Democratic Party of Japan (CDP), and the LDP’s former coalition partner Komeito are considering joining together under “the banner of centrist policies and centrist principles”. The CDP and Komeito currently hold a combined total of 172 seats in the Lower House compared to the government’s current slim majority of 233 seats. Komeito is reportedly considering forgoing fielding candidates in single-seat districts and urging supporters instead to vote for CDP candidates instead according to the Sankei newspaper. It adds to uncertainty over whether Prime Minister Takaichi will be able to turn her strong personal approval ratings into a decisive election victory even as the LDP’s own support ratings remain disappointing.                     

POSITIVE CORRELATION BETWEEN PRICE OF OIL & USD

Source: Bloomberg, Macrobond & MUFG GMR

GBP/USD: Geopolitical risks and UK GDP in focus

The biggest moves overnight have been in the commodity markets. The price of oil has declined sharply by around -3.5% reflecting some relief over the risk of supply disruptions. After US intervention in Venezuela and threats to use military force in Iran, the price of Brent crude oil has jumped from USD60/barrel to a high yesterday of USD66.82/barrel. It has dropped back toward USD64/barrel overnight after President Trump indicated that he might hold off from attacking Iran for now after saying he was reassured by sources “on the other side” that the government in Tehran would stop killing people involved in the protests. When asked if military action was off the table, he stated that he would “watch it” and “see what the process is”. The jump in the price of oil prices at the start of this year poses a risk to our view that prices are likely to fall for a fourth consecutive calendar year in 2026 weighed down by a record supply glut. Our expectation a the lower price of oil support our forecast for a weaker US dollar which became more positively correlated to the price of oil last year. Perhaps reflecting the fact that lower energy prices are more supportive for terms of trade and growth outside of the US in Europe and Asia, and will create more favourable conditions to encourage the Fed to keep lowering rates this year. The US dollar could prove stronger than we expect if there is a significant oil price spike.

So far the pick-up in the price of oil has not significantly altered market expectations for monetary policy of major central banks. The Fed and BoE are still expected to cut rates by a further 50bps this year. Yields in the UK are still under downward pressure at the start of this year both at the short and long end of the curve. The 10-year Gilt yield has fallen to its lowest level since the end of 2024. It fits with our view for slowing inflation in the UK and further BoE rate cuts this year which we expect to result in a weaker pound against the euro (click here). The pound has derived some support this morning though from the release of the latest monthly UK GDP for November which revealed stronger growth of 0.3%M/M despite budget uncertainty. Even if UK growth is flat in December, it would leave GDP on track to expand by 0.2% in Q4.  At the last MPC meeting, the BoE staff were expecting flat growth in Q4. While the upside growth surprise is a welcome development, it does not significantly alter our expectations for further BoE cuts and a weaker pound this year.    

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com