FX Weekly

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Lack of conviction with only modest FX moves

FX View:

The US dollar advanced marginally last week (DXY 0.2%) with the euro the underperforming G10 currency. The dollar got a lift into the end of the week following President Trump’s comment suggesting Kevin Hassett is out of the running to be Fed Chair. The news over the weekend of fresh tariffs on European countries supporting Greenland has had limited FX impact with only modest dollar selling. Eyes this week will be on tariff developments and on Japan. Friday is when the Diet reconvenes and it is expected that PM Takaichi will immediately dissolve parliament and call a general election. Strong intervention rhetoric helped the yen last week but if the BoJ maintains a cautious tone to future rate increases we will likely see renewed yen selling. We also highlight the positive fundamental backdrop for the Australian dollar that points to further appreciation ahead. Tomorrow is also a scheduled Opinion Day for the US Supreme Court when we could possibly get a ruling on the legality of using IEEPA to implement reciprocal tariffs.

EUR UNDERPERFORMS IN WEEK OF MODEST FX MOVES

Source: Bloomberg, 16:15 GMT, 16th January 2026 (Weekly % Change vs. USD)

Trade Ideas:

We are maintaining our long EUR/JPY trade idea, opened last week and we continue to hold a long AUD/GBP trade idea.

JPY Flows: Portfolio, by investor type: :

The December International Transactions in Securities was released last week which highlighted the strong foreign investor buying of JGBs in 2025.

Price Action Analysis: Fed Independence in the current Trump Era:

This week our analysis highlights that when Trump intervenes and puts Fed independence at risk, the FX market reaction to sell the dollar fades more quickly than previously perhaps reflecting scepticism that Trump can control monetary policy and/or longer-term rates.

FX Views

JPY: Politics, the BoJ and the yen

The yen advanced toward the end of last week although over the whole week, the yen ended the worst performing G10 currency as election speculation that began the previous Friday continued to undermine yen performance. The intra-day high last week was 159.45, the very same high recorded on the day when the MoF last intervened on 12^th July 2024. Being back in the intervention zone has resulted in the predictable pick-up in the intensity of verbal intervention. Comments on Thursday from Finance Minister Katayama and Vice Finance Minister for International Affairs Mimura both used words suggesting the potential for imminent intervention if yen selling persisted. Katayama specifically cited the move in the yen on 9^th January as being “unwarranted”. The low-to-high intra-day move on 9^th in USD/JPY was a mere 0.9% suggesting the bar for justifying intervention on intra-day moves has come down notably. This week will end with a flurry of key developments in Japan – on Friday 23^rd Jan the nationwide CPI data for December will be released, the BoJ will announce its monetary policy decision and the Diet is scheduled to reconvene with a high probability that PM Takaichi will dissolve parliament and formally call a general election.

On the face of it, the nationwide CPI data this week will suggest reason for caution from the BoJ. The YoY nationwide core CPI is set to fall notably, from 3.0% to 2.4% but this large drop will reflect the falling out of YoY calculations a sharp jump in food prices and also new fuel subsidies being implemented. But the core-core rate will show a much more modest decline, from 3.0% to 2.8%. Still, the momentum for now, no matter which inflation gauge you look at, is indicating some degree of disinflation which will certainly reassure the BoJ at this week’s meeting.  The fact that inflation in the euro-zone is at target and inflation in the US is coming in weaker than expected will also likely be noted by the BoJ.

That backdrop, despite the yen being at weaker levels, is likely to ensure that Governor Ueda sticks to the standard script and we see limited risks of any notable upturn in hawkish tone. If by Friday USD/JPY is say above the 160-level there would then be a greater risk of a more hawkish message and certainly more focus on FX-related inflation risks. In the eight BoJ meeting held in 2025, the day of the meeting saw USD/JPY declined on just one occasion (by 55pips) in March. On two other occasions USD/JPY was unchanged and in the other five meetings, USD/JPY  jumped by an average of 150pips. So a USD/JPY drop is a rarity of late and given the BoJ has just hiked rates in December, the prospects of a hawkish press conference is low. Given Friday’s meeting will also likely coincide with the dissolution of parliament, Governor Ueda is likely to thread carefully and avoid any bold statements.

YOY NATIONWIDE CORE CPI SET TO DROP NOTABLY

Source: Bloomberg, Macrobond & MUFG GMR

J ETF HOLDINGS REDUCTION AT 330BN P YEAR

Source: Bloomberg, Macrobond & MUFG GMR

Today also saw the commencement of BoJ ETF sales that had been previously announced at the September 2025 policy meeting. Then the BoJ reported book value holdings of JPY 37.1trn and a market value of JPY 83trn. The plan is to conduct sales at a very slow pace – just JPY 330bn per year, implying that this would take around 112 years to complete. Still, these sales will help from a government fiscal position standpoint with sales locking in a handsome profit after strong equity market gains in recent years. Bloomberg estimates that first-year sales will realise about JPY 1.4trn in profit that equates to about 1.7% of planned government revenues.

Despite the recovery of the yen toward the end of last week, the gains recorded on the initial reaction of a possible election remain intact. So some election risk premium remains in the price of the yen. However, the snap election strategy has its risks and the government needs to turn the negative momentum in LDP voting seen at the last two elections (upper house and lower house) and then gain a significant number of seats (from the current 196 to 233) in order to avoid having to work in coalition again. A continued coalition with Ishin Party also remains possible. This week the opposition parties became more unified with The Democratic Constitutional Party of Japan forming a new party with New Komeito. A more unified opposition would be a new challenge for the LDP which has benefitted from the fact that voters in Japan have rarely been offered a credible alternative. The assumption that strong approval ratings for PM Takaichi will translate to a strong performance in a general election could be questioned by the market over the coming weeks.

This week the MoF International Transactions in Securities data was released for December and revealed that foreign investors bought a record JPY 14,495bn of Japan bonds in 2025 as a whole underlining the dominance of foreign investors in supporting the JGB market. Yes, foreign investors only own about 12% of the JGB market but the 2025 flow still highlights the importance of foreign investors in supporting the JGB market at current prices. Either a strong LDP victory or a disappointing one holds risks from an investment perspective. If domestic demand for JGBs remained mixed and foreign investors pulled back, it could well spark JGB market turmoil. Whatever the outcome of the election, assuming PM Takaichi is still PM, there will need to be stronger messaging that Japan is not pursuing a policy of ‘fiscal dominance’ that sees policy geared toward debt sustainability rather than price stability.   

A sharp sell-off in the JGB market today on concerns over further fiscal stimulus measures after the election underlines the risks of instability in Japan that could see further sharp yen depreciation. The BoJ this week is unlikely to provide JPY support.

RECORD BUYING OF JAPAN BONDS BY FOREIGN INVESTORS – 14.5TRN IN 2025 A CALENDAR YR RECORD

Source: Bloomberg, Macrobond &  MUFG GMR

USD/JPY DIVERGENCE WITH DXY UNDERLINES SUSTAINED YEN UNDERPERFORMANCE

Source: Bloomberg, Macrobond &  MUFG GMR

AUD: Fundamentals moving in favour of stronger AUD at start of 2026    

The USD has continued to grind higher at the start of this year despite President Trump’s latest attack on the Federal Reserve’s independence and now renewed tariff threats related to Greenland. The dollar initially weakened after the DoJ launched a criminal investigation into Fed Chair Jerome Powell regarding his congressional testimony about renovation costs at the Federal Reserve’s headquarters. However, the sell-off proved short‑lived, reflecting scepticism that this latest attack will pressure the Fed into lowering interest rates. It could even backfire if FOMC participants rally around Chair Powell and keep rates unchanged for longer at the start of the year as a way to send a defiant message to President Trump. Further undermining the President’s move, three Republican senators have openly opposed the action, including Thom Tillis, who has vowed to block Trump’s nominees to the Federal Reserve—including the Fed Chair—until the investigation is fully resolved. A total of four Republican senators would be required to block Trump’s Fed Chair nominee.

The high‑beta commodity currencies—the AUD and NZD—have been the only two G10 currencies to buck the broader trend and strengthen against the US dollar at the start of this year. AUD/USD regained upward momentum late last year after breaking out of the 0.6400–0.6600 trading range that had held since May. The pair has since climbed to a high of 0.6767 in early January, reaching its strongest level since October, prior to President Trump’s election victory. The AUD, along with other G10 commodity currencies, has been benefiting from growing investor optimism about the global growth outlook and an improvement in overall risk sentiment.

In recent months, the global economy has experienced its strongest run of positive economic surprises since the first half of 2024. This has provided further reassurance that global activity is proving more resilient than expected to the trade disruptions triggered by President Trump’s tariffs. At the same time, investors remain optimistic that the AI boom, together with looser fiscal and monetary policies and an ongoing easing in financial conditions, will deliver additional support for global growth in 2026. The stronger‑than‑expected run of global economic data has also coincided with a bullish breakout in global commodity prices. The CRB Raw Industrials Index has climbed sharply—by around 6.5% since late November—helping to improve Australia’s terms of trade and supporting a stronger AUD.   

AUD HAS OUTPERFORMED AT START OF 2026

Source: Bloomberg, Macrobond & MUFG GMR

AUD SUPPORTED BY RISING COMMODITY PRICES

Source: Bloomberg, Macrobond & MUFG GMR

At the same time, the AUD has benefited from a hawkish repricing of RBA policy expectations. Short‑term yields in Australia have seen an outsized move to the upside over the past three months compared with other G10 economies. The 2‑year Australian government bond yield has risen by almost 70bps, versus an average increase of around 20bps elsewhere in the G10. This shift has reinforced the AUD’s status as a high‑yielding G10 currency and strengthened its carry appeal. The main exception has been the UK, where short‑term yields have fallen by roughly 20bps. The widening yield differential between Australia and the UK continues to support our long AUD/GBP trade recommendation.

The sharp move higher in Australia’s short‑term yields has been driven by a hawkish repricing of the outlook for the RBA’s key policy rate. The RBA delivered its last rate cut in August, but at its December meeting it unexpectedly signalled that it is considering a swift policy U‑turn by raising rates in 2026. Policymakers noted that “risks to inflation have tilted to the upside” and indicated they would take additional time at the start of this year to assess the persistence of the recent pickup in price pressures. Headline inflation rose to 3.2% in Q3, and monthly data point to a further increase in Q4. A tight labour market is adding to the RBA’s concerns: employment conditions have proven more resilient than expected, with the unemployment rate rising only modestly—by 0.3 percentage points—to 4.3% over the first eleven months of last year. Next week’s labour market report, due Thursday, will provide additional insight into the strength of labour demand. These developments have led the Australian rates market to price in roughly 20bps of tightening in Q2.

Another external factor supporting the AUD has been the paring back of concerns over downside risks to growth in China. The trade truce between China and the US was extended for a year in November. Over the past week, President Trump threatened to impose a 25% tariff on countries conducting business with Iran—a move that could potentially undermine the truce, given that China is Iran’s largest trading partner. Nevertheless, the latest trade data for December from China showed that it has adjusted better than expected to higher US tariffs, with China posting a record trade surplus of USD 1.19 trillion in 2025. While exports to the US fell sharply by –30.2% Y/Y in December, they were offset by stronger exports elsewhere, including to the EU (+11.5% Y/Y) and ASEAN economies (+11.3% Y/Y). Overall exports rose by +6.6% Y/Y. The reduction in trade‑disruption risks and the record surplus have encouraged Chinese policymakers to allow the CNY to strengthen, as reflected in USD/CNY breaking below 7.0000 at the start of this year. This development provides an additional tailwind for the AUD, given its positive correlation with the CNY. We expect the CNY to strengthen further in 2026, though at a slower pace than in recent months (click here). The escalation of tariff risks over the weekend related to Greenland could result in some trade disruptions, but this would be more Europe-focused and would be less of a risk to Australia than disruption in Asia.

3-MONTH CHANGE IN 2YR GOVT. BOND YIELDS

Source: Bloomberg, Macrobond & MUFG GMR

CORRELATION BETWEEN AUD/USD & USD/CNY

Source: Bloomberg, Macrobond & MUFG GMR

Weekly Calendar

Source: Bloomberg & MUFG GMR

Key Events:

• The BoJ is preparing for another hold, but yen weakness could accelerate future rate hikes. The Bank of Japan is expected to leave policy rates unchanged this week, following its December hike to 0.75%. Recent reporting suggests the BoJ is placing greater emphasis on the yen’s influence on inflation, with renewed weakness potentially prompting an earlier rate increase than currently anticipated. Our baseline remains a June hike, although a move as soon as April is possible if JPY depreciation persists. We do not expect any major adjustments to the updated economic forecasts.
• Political pressure on the Federal Reserve has escalated sharply as President Trump intensifies attacks on its independence. Over the past week, scrutiny has intensified after the Department of Justice opened a criminal investigation into Fed Chair Jerome Powell. Market reaction has been relatively muted so far, reflecting scepticism about the investigation’s legitimacy and concerns it may ultimately backfire. Senate Republicans have warned they will block President Trump’s nominee for the next Fed Chair unless the probe is halted. This follows Trump’s decision last year to fire Governor Lisa Cook — a dismissal still unresolved as she remains in her role pending a Supreme Court ruling. The Court is scheduled to hear oral arguments on the case on Wednesday.
• Inflation data releases will be the main economic focus, with the UK CPI likely to have the biggest market impact. This week brings new CPI reports from Canada, the UK, New Zealand, and Japan. Of these, the UK release is the most important for markets, given expectations that the Bank of England may cut rates again as early as March or April. By contrast, the Bank of Canada and the RBNZ have signalled greater comfort with current policy settings. UK inflation is projected to fall sharply back to the BoE’s 2% target in 2026, aided by government budget measures. While the BoE has indicated it will look through near‑term volatility in inflation, a sustained decline — combined with ongoing labour market softness — could give policymakers more room to ease.