FX Weekly

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JPY rebounds after Japan election

FX View:

The JPY has staged a strong rebound over the past week, defying market expectations for further weakness following Japan’s lower house election. The risk‑reward balance of holding short JPY positions has become less attractive in the near term. The Japanese authorities continue to signal a readiness to intervene to deter renewed JPY selling, and the fiscal and policy risk premia that had been priced into the JPY and JGBs in recent months have been pared back. The JPY’s rebound could extend further if there is a deeper correction in global risk assets. At the same time, the USD has continued to rebound over the past week, albeit more modestly. Stronger employment growth at the start of this year has eased immediate pressure on the Fed to cut rates, although slowing inflation still leaves the door open to further easing in 2026. Lower U.S. interest rates, increased FX hedging by foreign holders of US assets, and diversification flows into non‑US markets continue to support our forecast for a weaker USD in 2026.

JPY REBOUND & WEAKER USD HELP TO LOWER USD/JPY

Source: Bloomberg, 18:00 GMT, 13th February 2026 (Weekly % Change vs. USD)

Trade Ideas:

We are closing our long AUD/GBP trade recommendation to take profit, and our long EUR/JPY trade idea after the stop-loss was hit.

IMM Positioning: 

The latest IMM weekly positioning data for the week ending 10th February revealed that Leveraged Funds have sharply increased their short USD positions for the third consecutive week

Weekly Calendar:

The RBNZ will hold its first policy meeting of 2026 this week. The central bank is widely expected to leave the OCR on hold, having delivered what was signalled to be the final rate cut of the easing cycle in November. The RBNZ has indicated that rates are likely to remain unchanged throughout 2026.

FX Views

USD/JPY: Japan election fallout and US data releases in focus

The USD and JPY have traded on a firmer footing over the past week, although the scale of the JPY’s rebound has been far more impressive. Market participants had been positioned for further USD and JPY weakness heading into last week, which did not materialize and has encouraged some position liquidation. The latest IMM report released at the end of last week revealed that leveraged funds reduced their short JPY positions for the fourth consecutive week. Speculative shorts have now been almost halved from their peak in the week ending 13^th January. The heightened threat of Japanese intervention to support the JPY, combined with the failure of the lower‑house election result to trigger another leg lower in the currency, has made the risk‑reward of holding JPY shorts less attractive in the near term.

Market participants also appear to have scaled back the fiscal and policy risk premia previously priced into the JPY and JGBs. The 30‑year JGB yield has fallen back toward levels seen at the start of the year, almost fully reversing the sharp sell‑off triggered by Prime Minister Takaichi’s decision to call a snap election and pledge a two‑year freeze on the food sales tax. A measure estimated to cost around JPY 5 trillion per year. Following her election victory, Takaichi reiterated that she intends to move ahead with the temporary suspension of the food tax and aims to implement it “at the earliest date possible.” She will launch discussions through a bipartisan national council and has instructed the group to “present an interim plan before the summer.” The government is still evaluating funding options but has repeatedly ruled out using deficit‑financing bonds. Potential funding sources mentioned include non‑tax revenues, cuts to existing subsidies, and adjustments to social‑welfare spending. Some government officials have even floated the possibility of tapping the surplus generated by the FX‑reserve special account, which totalled a record JPY 5.4 trillion in the last fiscal year. Throughout these discussions, Takaichi has stressed that “responsible, proactive fiscal policy is at the core of the policy transition.” Compared with opposition parties, the LDP’s plan is relatively restrained. The main opposition bloc, the Centrist Reform Alliance, campaigned on permanently abolishing the consumption tax on food which was a far more costly proposal.

Even after the JPY’s strong rebound over the past week, the Japanese authorities continue to stress that they remain prepared to intervene to support the currency, signalling clearly that they want to discourage a renewed build-up of short JPY positions. With the lower‑house election now behind us, there is no obvious macro catalyst to trigger further near‑term JPY selling, although broader market conditions remain favourable for carry trades. FX volatility has picked up at the start of this year, but it is still relatively low by historical standards. At the same time, global investor risk sentiment has been improving, with global equity markets rising to fresh record highs. U.S. equities have underperformed, particularly the tech sector, but a deeper and more broad‑based correction would likely be required to trigger a meaningful squeeze in JPY‑funded carry trades and reinforce the JPY’s rebound over the past week. 

JPY & JGBS REBOUND AS RISK PREMIUM PARED BACK

Source: Bloomberg, Macrobond & MUFG GMR

JPY UNDERPERFORMS SIGNIFICANTLY SINCE AUTUMN

Source: Bloomberg, CFTC, Macrobond & MUFG GMR

Beyond last week’s sell‑off in USD/JPY, the USD has staged a modest rebound, extending the recovery that began after President Trump nominated former Fed Governor Kevin Warsh as the next Fed Chair (click here). This has helped lift the dollar index back above the 97.000 level, moving it further away from the 27^th January low of 95.551. Downside risks for the USD and short‑term U.S. yields have eased in the near-term following the release of the latest January nonfarm payrolls report, which has reduced immediate pressure on the Fed to cut rates further. Employment growth has strengthened over the past three months, while the unemployment rate has stabilised around 4.3%. The increase in the unemployment rate last year was relatively modest considering that employment growth averaged only about 15k jobs per month in 2025. It was the weakest calendar year performance since the COVID shock in 2020. President Trump’s tighter immigration policies have restricted labour‑supply growth, lowering the breakeven pace of job creation required to prevent the unemployment rate from rising further.

Market participants will now be watching closely in the coming months to assess whether the recent pick‑up in employment growth is sustainable, or whether it has been driven mainly by temporary factors such as favourable weather conditions and a sharp rise in health and social‑care jobs. After such weak job growth last year, and repeated downward revisions, investors are understandably cautious about extrapolating the stronger employment gains seen over recent months. At the same time, the door will remain open for Fed rate cuts this year if inflation continues to slow. The latest US CPI report for January showed that headline and core inflation slowed to annual rates of 2.4% and 2.5% respectively. We expect inflation to decelerate further this year as the inflationary effects of last year’s tariff hikes begin to fade, labour‑market weakness continues to dampen wage growth, and stronger productivity growth allows the US economy to expand without generating additional price pressures. The Financial Times has also reported that the Trump administration is weighing up plans to lower some tariffs on steel and aluminium imports in response to concerns about the cost of living ahead of the mid‑term elections. In this environment, we continue to favour further Fed cuts and a weaker USD in 2026 (click here). The outperformance of assets outside of the US is also continuing to encourage diversification flows and a weaker USD.

US INFLATION SET TO SLOW FURTHER

Source: Bloomberg, Macrobond &  MUFG GMR

EQUITIES OUTSIDE OF US OUTPERFORMING

Source: Bloomberg, Macrobond & MUFG GMR

Weekly Calendar

Source: Bloomberg & MUFG GMR

Key Events:

• After the stronger than expected January nonfarm payrolls report, market participants will be watching Federal Reserve communication closely in the week ahead. Key events include the release of the minutes from the January FOMC meeting, in which the Fed left policy rates on hold but kept the option open for rate cuts later this year. In addition, Fed Governor Barr and San Francisco Fed President Daly are scheduled to speak on artificial intelligence and the US economy, comments that may offer further insight into the Fed’s policy outlook. Toward the end of the week, the advance estimate of US Q4 GDP will be released. The report is expected to confirm that growth moderated from the exceptionally strong pace seen in Q3, but nevertheless remained solid heading into year‑
• The UK rate market has shifted to price in another Bank of England rate cut as early as next month, following the dovish MPC update earlier this month. Governor Bailey and MPC member Mann have both indicated that they may consider voting for rate cuts, depending on how upcoming economic data evolve. The releases of the latest labour market figures, CPI report, and retail‑sales data in the week ahead will offer further insight into whether wage growth and inflation are continuing to slow in the UK. The Bank of England appears to be becoming less concerned about persistent upside inflation risks.
• The RBNZ will hold its first policy meeting of 2026 this week. The central bank is widely expected to leave the OCR on hold, having delivered what was signalled to be the final rate cut of the easing cycle in November. The RBNZ has indicated that rates are likely to remain unchanged throughout 2026, but markets have already begun to price in the possibility of a rate hike as early as Q3 this year. As a result, market participants will be watching closely for any signs of a hawkish shift in the RBNZ’s policy guidance.