FX Weekly

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USD doubts to persist

FX View:

The US dollar is ending this week on a stronger footing following the US jobs report that was a little better than expected. The overall picture though is still consistent with a slowing labour market. There were some notable downward revisions to previous months (in particular in transportation & warehousing suggesting a trade tariff impact) and job creation continue to be highly dependent on the non-cyclical health and education sectors – accounting for 65% of total jobs created in March/April. The yen underperformed this week helped by the stabilisation of super-long JGB yields with the BoJ/MoF expected to help ease the over-supply problem. But if JGB conditions continue to improve and global risk appetite stays strong as trade tension ease we would expect the BoJ to turn more hawkish given the ongoing high inflation backdrop in Japan. Hence, we do not expect yen selling to persist. We also look at the Swiss franc outlook and given the ECB caution and easing risk aversion, we may see some alleviation of the upward pressure on the franc over the short-term.

JPY UNDERPERFORMS AS JGBS STABILISE & AFTER NFP REPORT

Source: Bloomberg, 13:50 BST, 6th June 2025 (Weekly % Change vs. USD)

Trade Ideas:

Our short USD/JPY trade view remains open and despite the bounce today on the slightly better jobs report we do not expect this move higher to extend much further given the Japanese authorities will likely resist a weaker yen given domestic inflation and long-end JGB yield instability.

JPY Flows:

This week we take a look at the Balance of Payments data for March that showed a sharp rebound in Japan’s investment income surplus.

Intraday Volatility Analysis for USD, JPY, EUR:

In May–June, FX volatility moderated overall but became more concentrated around the London open, marking a shift in timing and intensity compared to earlier months.

FX Views

JPY: BoJ JGB focus could force more hawkish message

The yen is the worst performing G10 currency as the revival of risk on expectations of a possible further de-escalation in the US-China trade conflict fuels selling of the low-yielders, helped today by a decent US jobs report that was marginally better than expected. The weakness of the yen has been reinforced by the improvement in JGB market conditions that has seen JGB yields decline further. Despite a poor 40-year JGB auction last week and another poor 30-year auction this week, yields have fallen further. The 30-year JGB yield fell 8bps this week to close at 2.89%. the yield is now down 29bps from the closing high on 22nd May. Even if global risk conditions continue to improve on say a further easing in global trade tensions and JGB yields stabilise or decline further, we doubt there is much scope for the yen to weaken notably further from current levels. We suspect the BoJ and the MoF will be privately unhappy to see much further yen weakness and the BoJ could be quick to pivot to a much more hawkish communication in an attempt to limit further yen weakness.

The drop and stabilisation of JGB yields are down to a number of factors. Firstly, the minutes from the BoJ’s Bond Market Group meeting were released on Monday which provided a summary of feedback from market participants. On the topic of the pace of reduction in monthly JGB purchases the details of the feedback indicated a slight bias that seemed to point to a greater than assumed risk of a slowdown in the pace of purchases from the current JPY 400bn per month. The BoJ will announce the conclusions at its meeting on 16th/17th June. Some of the feedback reported in the minutes called for the pace to be cut from JPY 400bn to JPY 200bn. Bloomberg today reporting citing “people” that the BoJ is indeed considering reducing the pace of reduction in monthly purchases to a level between JPY 400bn-200bn. While this is possible we could see the BoJ maintain the pace but communicate a greater willingness to be flexible – the key according to Governor Ueda was that cuts balanced “predictability and flexibility”. Any communication by the BoJ could emphasise the bias to slow the pace if required. In any case, market participants also see the MoF as another avenue for helping rectify the supply/demand imbalance in super-long JGBs. The MoF in issuance plans already published revealed a JPY 1.2trn cut in issuance for both 30yr and 40yr JGB issuance with 5-year issuance increased along with t-bill issuance. Further adjustments could be made. Foreign investors have been key buyers in super-long JGBs and after four weeks of selling of total JGBs, weekly MoF data yesterday revealed a notable return to buying last week, totalling JPY 1,165bn.

30YR US-JP SPREAD VERSUS USD/JPY

Source: Bloomberg, Macrobond & MUFG GMR

SUPER-LONG-TERM JGB YIELD SPREADS OVER 10-YEAR

Source: Bloomberg, Macrobond & MUFG GMR

We don’t yet have the JSDA data revealing the breakdown of JGB buying in May after record selling over the previous 3mth period to April by Japanese Lifers and banks. At higher yields and given the increased uncertainties over debt sustainability in the US following Moodys’ downgrade and the efforts to pass President Trump’s ‘One Big Beautiful Bill’ appetite for US securities may diminish relative to JGBs where higher yields has closed the US premium considerably. From the high in January, the US-JP 30year spread has narrowed by around 65bps and from the inflation shock peak in 2022 has narrowed by 125bps. Super-long JGB spreads over the 10-year have surged to record levels in both 30-year and 40-year JGB yields.

Japan does have considerable potential for investment shifts over time to help cap long-term bond yields. Japan holds nearly JPY 700trn of bonds and equity investments abroad with JPY 356trn of that in fixed income. Around JPY 130trn of the JPY 700trn placed abroad (18.5%) is by Japan’s Government Pension Investment Fund (GPIF) and at the end of March the GPIF confirmed an unchanged asset mix for the 5-year period ahead – 25% in each of domestic and foreign bonds and equities. Higher returns abroad could encourage continued foreign asset investments, especially given the return objective of GPIF of 1.9% + the nominal wage growth. But with super-long yields now that much higher there could be some shift back to JGBs. The newly confirmed asset mix does allow a +/- 6% deviation in domestic bond holdings and a +/- 5% for foreign bonds. Furthermore, in April a group of LDP Diet members proposed to the government that the GPIF should increase its allocation to alternative investments. Currently up to 5% of total assets can be invested in alternative investments with currently just 1.65% invested. The LDP members added that it was “desirable for funds to flow into domestic VC and PF funds in particular”. If JGB yields move higher still we would likely see shifts from domestic investors taking place.

But ultimately we see the BoJ as likely turning more hawkish if global financial market conditions remain more favourable after the notable improvement following the de-escalation of trade tensions. The US Treasury yesterday also called on Japan to run a tighter monetary stance in order to strengthen the undervalued yen. Scott Bessent has consistently cited the BoJ as the reason for yen undervaluation. While that alone would unlikely result in a shift in BoJ policy, the inflation backdrop likely increasingly will. Household spending fell 0.1% YoY in April with the breakdown indicating higher cost of living is eroding non-essential spending. While food inflation has slowed it remained at 6.5% YoY in April with rice prices up 98.4%. YoY Services PPI also remains elevated at 3.1%. The BoJ will also not want to see JPY depreciation given the risks of an FX move feeding further super-long JGB instability that in turn would lead to possible complaint by the US. We see current USD/JPY levels post-NFP data as close to peaking with scope building for another sustained move back toward the 140-level.

BALANCED GPIF PORTFOLIO BUT WITH SCOPE FOR +/-6% SHIFT IN DOMESTIC BONDS

Source: GPIF as of Dec 2024 & MUFG GMR

FOREIGN INVESTOR BUYING OF JAPAN BONDS RESUMED LAST WEEK

Source: Bloomberg, Macrobond & MUFG GMR

G10 FX: High beta commodity currencies outperforming safe havens

The high beta G10 commodity currencies of the NZD, NOK and AUD have outperformed over the past week supported by the ongoing improvement in global investor risk sentiment. MSCI’s ACWI global equity index hit a record high in recent days extending its advance since the low in April after President Trump’s Liberation Day tariffs announcement to almost 24%. The sharp improvement has been encouraged building investor optimism that trade disruption could be less than intially feared. The delayed implementation of higher “reciprocal” tariffs including on goods imported from China, and recent judgement from the US Court of International trade that the “reciprocal” and fentanyl tariffs are illegal has boosted investor risk sentiment.

Trade news over the past week has been more mixed. President Trump’s plans to double tariffs on steel & aluminium to 50% came into on Wednesday. However there has been positive developments at the end of this week after Presidents Trump and Xi agreed to hold further trade talks “shortly”. President Trump sounded more optimistic that “we’re in very good shape with China and the trade deal”. Bloomberg has also reported that President Trump has been in direct contact with Canadian Prime Minister Mark Carney as they seek to reach trade deal before the upcoming G7 Leaders’ Summit in Canada from 15th June. It has helped the CAD to extend its rebound the USD back closer to the 1.3600-level where it was trading prior to the run up to the US election in the autumn. he release yesterday of the latest trade report from Canada clearly highlighted the disruptive impact from trade disruption in April. The report revealed that Canada posted a record trade deficit totalling CAD7.14 billion. Canada has been hurt by the sharp slowdown in exports to the US which have fallen by 26.2% over the last three months to CAD60.4 billion. Exports to other countries have picked up (+12.3% to CAD18.3 billion) but not enough to fully offset the slowdown in exports to the US. The BoC acknowledged that the economy has been “softer but not sharply weaker” at this week’s policy when they decided to leave rates on hold. We expect the BoC to cut rates further this year although the risk of deeper cuts is diminishing. Deputy Governor Sharon Kozicki noted that there was less talk of catastrophic outcomes when speaking with businesses.

IMPROVING RISK SENTIMENT LIFTING AUD, NOK & NZD

Source: Bloomberg, Macrobond & MUFG GMR

SHARP SLOWDOWN IN CANADA’S EXPORTS TO US

Source: Bloomberg, Macrobond & MUFG GMR

The Trump administration also refrained from significantly stepping up complaints over the currency policies of their trading partners when the US Treasury released the latest semi-annual Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States report. The US Treasury acknowledged that there has been a decline in the scale and persistence of foreign exchange intervention amongst most major trading partners in recent years, but warned they will continue to closely monitor whether trading partners may act through foreign exchange interventions, or non-market policies and practices, to manipulate their currencies for unfair competitive advantage. No trading partner met all three criteria to be designated as currency manipulator in the report although Ireland and Switzerland were added to the monitoring list alongside China, Japan, Korea, Taiwan, Singapore, Vietnam and Germany. The US Treasury reiterated that China continues to stand out among our major trading partners for its lack of transparency around its exchange rate policies and practices. Going forward the US Treasury added that they will strengthen its analysis of trading partners’ currency policies and practices which may include: i) more intensive analysis of market dynamics in circumstances where a central bank is ostensibly intervening to mitigate disorderly market conditions or excess volatility when the domestic currency is under appreciation pressures, ii) greater vigilance of other potential means to influence exchange rates such as inappropriate use of capital flows measures or macroprudential measures, inappropriate activity by government investment vehicles such as pension funds or sovereign wealth funds. They noted that China appears to have relied more on state-owned banks rather than the central bank to manage the exchange rates in recent years. 

By adding Switzerland to the monitoring list it could potentially discourage the SNB from intervening in the foreign exchange market to prevent the CHF from strengthening further. However, the SNB have been quick to defend past policy action stating that “the SNB does not engage in any manipulation of the CHF”. The SNB acknowledged that they have taken note of the US Treasury’s report and together with the Swiss authorities remain in contact with the Us authorities to explain Switzerland economy and monetary policies. The SNB emphasized that the policy rate is main instrument for implementing monetary policy but that foreign exchange intervention may be necessary under certain circumstances to ensure price stability and does not pursue an exchange rate target. There is building pressure on the SNB to adopt unconventional easing measures again including negative rates and/or foreign exchange intervention after headline inflation fell back into negative territory (-0.1%) in May. We expect the SNB to lower policy rate to 0.00% this month which could intensify speculation over a potential return to negative rates from September at the earliest. Such speculation alongside improving global investor risk sentiment has been contributing to CHF underperformance over the 4-6 weeks. EUR/CHF is currently testing resistance from the 200-day moving average at just below the 0.9400-level. A break above could open the door to return to pre-Liberation day tariff levels at closer to the 0.9600-levels. The hawkish update this week from the ECB (click here) indicating they are closer to the end of their easing cycle and the new German government’s plans for EUR46 billion of corporate tax breaks are supportive for the EUR as well although we still expect further rate cuts later this year.   

RETURNING TO LOW INFLATION IN EUROPE?

Source: Bloomberg, Macrobond & MUFG GMR

CHF REMAINS STRONG ADDING TO SNB CONCERNS

Source: Bloomberg, Macrobond & MUFG GMR

Weekly Calendar

Source: Bloomberg & MUFG GMR

Key Events:

• The economic data calendar for the week is relatively light on top-tier events and/or data releases. The main economic data release from the US will be the latest US CPI report for May. Inflation data released at the start of this year has provided that the slowing trend remained in place prior to tariff disruption. It would have supported the Fed’s plans to lower rates further this year. However, the Fed and market participants are now watching closely to see how tariffs hikes will impact inflation in the coming months lifting the headline rate further above the Fed’s target. The release of the May US CPI report of May start to show more tariff impact. The release of the NFP for May today means that the Fed is unlikely to be in a rush to resume rate cuts in the near-term.
• The release of the latest labour market and monthly GDP reports from the UK will have an impact on market expectations for further BoE easing in the week ahead. The UK rate market has recently been scaling back expectations for further BoE rate cuts in response to stronger UK activity and inflation data as well as positive trade development. The UK-US trade agreement has helped to reduce downside risks to growth in the UK although details still need to be finalized. As a result, the UK rate market is currently pricing in 17bps of BoE cuts for the August MPC meeting. A further increase in the unemployment rate in the week ahead would support our forecast for another 25bps cut in August after hitting a fresh high of 4.5% in March. The May MPR forecasts expect the unemployment rate to pick up only modestly to 4.7% by year end.
• The ECB is scheduled to release their latest wage tracker in the week ahead. It is expected to provide a further reassuring indication that wage growth is likely to continue to slow in the euro-zone. The last update from April indicated negotiated wage growth with smoothed one-off payments of 3.1% in 2025 down from 4.8% in 2024. Unless there are any major upside surprises it should give the ECB more confidence that inflation to stay close to target and leave some room for further rate cuts.