FX Weekly

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USD outlook improves on Fed rate cut doubts

FX View:

The US dollar has gained across the rest of G10 this week and our forecast of notable dollar depreciation by year-end is certainly now more questionable. The premise of our view was that the missed jobs data would warrant Fed easing in December and prompt a turnaround. The stronger NFP along with a week of generally hawkish rhetoric from Fed officials mean a rate cut is now in much greater doubt. We still can’t rule a cut out – Vice Chair Williams today voiced support stating he still saw room for a cut in December. The strength of the dollar was led versus the yen with a larger than initially expected fiscal stimulus package that continues to intensify risks of JGB market instability ahead. We are now in the danger zone when intervention to support the yen could take place, especially given the tougher rhetoric used by the government in Tokyo today. A further sell-off of AI/Tech related stocks is the biggest dollar downside risk right now and while we may need to adjust the extent of dollar weakness we expect, a turnaround of current dollar strength is still more likely before year-end.

USD GAINS BROAD-BASED IN G10 AS FED RATE CUT EXPECTATIONS FADE

Source: Bloomberg, 13:00 GMT, 21st November 2025 (Weekly % Change vs. USD)

Trade Ideas:

We are closing our short USD/JPY trade idea after the stop-loss was hit. We are maintaining our long EUR/GBP and short CAD/CHF trade ideas.

JPY Flows: Balance of Payments:

The balance of payments data for September revealed the rolling 3mth sum for the investment income account hitting a new record high. The surplus in the 3mths to September equated to 8.5% of GDP. Much of this is FDI investment income which tends to be retained abroad rather than converted and hence this doesn’t as of yet fuel JPY buying.

JPY Weakness: Assessing the Risk of Intervention:

Recent flows indicate that market participants are not yet too concerned over intervention risk and/or doubt it will be effective in light of expectations for loose fiscal and monetary policies in Japan.

FX Views

JPY: Fiscal spending to test investor tolerance

The yen is stronger today and JGB yields are lower underlining the fact that the markets had already priced the confirmation of another fiscal stimulus package that had been well telegraphed to the markets over the last week. The 30-year JGB yield this month jumped by 35bps to the record intra-day high hit yesterday at 3.41% and the yield has since retraced. The yen is benefitting from this retracement as JGB yields stabilise but MoF intervention rhetoric and international developments (US equity market weakness and falling yields) have also helped the yen to rebound. Despite the price action today, the policies being pursued by PM Takaichi do still point to elevated risks of further JGB market instability and the risk of further yen selling.

The total size of the package announced this week is JPY 21.3trn broken into four separate components – 1) JPY 11.7trn for cost of living relief (energy subsidies, local grants, child allowances); 2) JPY 7.2trn for crisis management and strategic growth investments; 3) JPY 1.7trn for defence and diplomatic capabilities; and 4) JPY 2.7trn in tax cuts (income tax relief via an increase in the tax-free threshold and gasoline tax suspension). The general account government spending increase under this plan amounts to JPY 17.7trn, which is up from the JPY 13.9trn from a year ago. The government estimates that the reduction in cost of living measures (utility bill subsidies) will help reduce inflation by around 0.6-0.7ppt between February and April 2026. The government also estimated a boost to GDP of approx. JPY 24trn over a 3-year period through an estimated 1.4% lift to growth in each of the three years. Defence spending will accelerate lifting it as a percentage of GDP to the 2.0% target two years earlier than originally planned. Strategic spending includes the establishment of a 10-year shipbuilding fund and investments in AI, and semiconductor technologies. A JPY 20k give away to every child is also included at an estimated cost of JPY 400bn. That’s a measure that is unlikely to reduce inflation.  

An important aspect for fixed income investors will be what does this fiscal stimulus package mean for JGB supply. Last fiscal year, new deficit-financing JGB issuance totalled JPY 42.1trn – this was made up of an original JPY 35.4trn which then increased by a further JPY 6.7trn to finance last year’s supplementary budget. As noted above, this year’s spending package is larger (JPY 17.7trn vs JPY 13.9trn) and hence there is certainly a chance the new JGB issuance required will be larger. Like last year. Tax revenues are likely to be larger than planned under the original budget giving the government extra surpluses to utilise. PM Takaichi today stated that the full fiscal-year JGB issuance will be below last year. The original estimate for new deficit-financing JGB issuance for this fiscal year was JPY 28.6trn. This therefore is not a particularly difficult commitment to meet given there is effectively JPY 13.5trn (JPY 42.1 minus JPY 28.6trn) capacity before hitting a larger issuance total this year compared to last year. Given this year’s general account spending for the supplementary budget is 27% larger, the expectations is that issuance related to this fiscal stimulus package will increase by more than the JPY 6.7trn last year. A like-for-like increase would imply issuance of about JPY 8.5trn. Of course tax revenues and/or other surpluses could be larger meaning the issuance does not increase like-for-like.

30YR JGB YIELD HIT A RECORD HIGH THIS WEEK

Source: Bloomberg, Macrobond & MUFG GMR

YEN BUYING INTERVENTION UNSUCCESSFUL SO FAR

Source: Bloomberg, Macrobond & MUFG GMR

The 35bp move higher in 30-year JGB yields this month does suggest investors have anticipated the fiscal stimulus package requiring JGB issuance at least roughly in line with the issuance size from last year. But the overall essence of economic policy remains a growing risk for the JGB market. A larger fiscal spending package, announced as the BoJ remain uber-cautious over raising rates despite a sharp depreciation of the JPY will only reinforce JGB curve steepening ahead. There remains a lack of JGB demand amongst certain domestic investors that leaves the long-end vulnerable to further selling. JSDA bond flow data for October was released this week and revealed JPY 277bn worth of selling of super-long JGBs by Japan Life/Non-Life insurance companies. Sales have totalled JPY 554bn this year. City banks have sold JPY 2,340bn this year. In contrast foreign investors have bought a huge JPY 11,246bn this year and remain key to containing the scale of increase in super-long JGB yields. If foreign investors were to turn sellers due to doubts over economic policies in Japan, increased volatility and sharp moves higher in yields would be a real risk.

In that regard the direction of the JPY will be important. Intervention rhetoric intensified today with FM Katayama citing the Japan-US joint statement issued in September as justification for taking “appropriate action against disorderly FX moves”. We think Trump’s views will shape MoF actions to a degree and we certainly believe Trump and Bessent will be strongly opposed to a move in USD/JPY through 160.00. A trade deal has just been agreed and the response has been a sharp weakening of the JPY. The BoJ can play a role here and continued inaction could soon damage its credibility and compel the BoJ to act. A shift to more hawkish rhetoric from the BoJ will be needed for intervention to have any chance of success. A December hike seems unlikely and is priced at only a 16% probability but further JPY selling could see expectations rise.

The JPY is set to remain under downward pressure and the fiscal stimulus package this week will only add to perceptions of upside inflation risks coupled with the BoJ remaining cautious over raising rates. Intervention in or around the 160-level is quite likely but this will only prove successful if the BoJ’s stance shifts. In the meantime, US equity market weakness may limit JPY selling appetite for now.

JAPAN LIFER BUYING OF SUPER-LONG JGBS WEAK

Source: Bloomberg, MUFG GMR

FOREIGN BUYING OF SUPER-LONG JGBS STRONG

Source: Bloomberg, Macrobond & MUFG GMR

USD: Is the coast clear for the USD to strengthen further into year end?   

The USD has regained upward momentum over the past week as it attempts to break higher again after one failed attempt earlier this month. One bullish technical signal has been that the dollar index has closed above the 200-day moving average close to the 100.00-level for the first time since early March. USD strength has been broad-based over the past week with gains most evident against the NOK (-1.8% vs. USD), CHF (-1.6%), AUD (-1.6%), and NZD (-1.6%).           

The USD has benefited in part from the more uncertainty over whether the Fed will deliver a third back-to-back cut in December. Our forecasts (click here) for the USD to weaken further heading into year-end were based on the assumption that the Fed would deliver another cut in December. However, we must acknowledge that another rate cut as soon as next month is more finely balanced now posing upside risks for the USD. Firstly, the Bureau of Labour Statistics announced that the October nonfarm payrolls report will not be released. Instead, the October data will be released alongside the nonfarm payrolls report for November. Importantly, the release of the November nonfarm payrolls report has also been delayed until 16^th December. It means that the Fed will lack information on the health of the labour market in October and November when deciding on monetary policy at the next FOMC meeting on 10^th December. Fed officials including Chair Powell have already indicated that the data fog would encourage caution over cutting rates further in December.                                            

Secondly, the release of minutes from the last FOMC meeting in October highlighted that was clear opposition to another cut as soon as December. The minutes backed up comments from Fed Chair Powell at the meeting when he warned “ a further reduction in the policy rate at the December meeting is not a foregone conclusion – far from it”. The minutes revealed that “many” participants thought it would likely be appropriate to keep rates on hold in December compared to “several” who thought a cut could well be appropriate. While “many” is not necessarily a majority on the FOMC, it does indicate a higher risk of a skip in December. Yet comments today from New York Fed President Williams stating he still sees room for a near-term rate cut send a timely reminder that the leadership at the Fed could still push for a cut. A decision to leave rates on hold in December would be viewed as more of a temporary pause than an end to the easing cycle. "Most" participants still thought further rate cuts would be appropriate over time.

USD REBOUND RUNNING AHEAD OF YIELD SPREADS

Source: Bloomberg, Macrobond & MUFG GMR

 “CYCLICAL” EMPLOYMENT HAS BEEN WEAK

Source: Bloomberg, Macrobond & MUFG GMR

Thirdly, the delayed release of the November nonfarm payrolls report means that the Fed will likely place even more weight on the September nonfarm payrolls report when making their policy decision in December. The September employment report revealed that employment growth picked up to 119k which was the strongest reading since April.        It provides some tentative encouragement that the US labour market has passed the worst part of the slowdown in demand in response to heightened trade policy uncertainty triggered by President Trump’s “Liberation Day” tariffs announcement in April. Admittedly, one should never put too much emphasis on just one reading. The stronger September employment reading was supported by favourable seasonal factors. The breakdown of employment growth also revealed that the pick-up was mainly driven by less cyclically sensitive factors. Private education and health accounted for 59k of the jobs gains and the government for 22k. Nevertheless, it should help ease fears that labour demand has weakened further which some Fed officials have indicated would be required to justify another rate cut. The pick-up in the unemployment to a new cyclical high of 4.4% which almost rounded up to 4.5% does highlight though that labour market conditions are gradually loosening creating a supportive backdrop for the Fed to make policy less restrictive. The increase in the unemployment rate has been driven by a sharp pick-up in labour force growth in recent months (+906k in August and September) which has not been fully absorbed by the strong employment growth (+539k). It marks a departure from this year’s underlying trend of slower labour force growth in response to tighter immigration controls. Overall, we are not convinced the September NFP report is weak enough on its own to justify another rate cut in December.

In light of recent supportive developments for the USD, we are planning to curtail our forecasts for further USD weakness heading into year end when we release our next monthly FX Outlook report at the start of December. However, we remain wary of the risk of a deeper correction lower for US AI/tech stocks heading into year end. The failure of US AI/tech stocks to rebound on the back of  stronger earnings from Nvidia this week will add to investor unease over lofty valuations. After  another strong year of gains, investors may decide to take profit and take some risk off the table heading into year end. The USD could weaken if there are outflows from US AI/tech stocks after record foreign buying of US equities in the five months to September. Furthermore, a deeper sell-off could tip a finely balanced Fed decision in favour of a cut in December. The Nasdaq composite index peaked at the end of October and has since declined by around 8%. Over this period the high beta G10 currencies of the NZD, NOK and AUD have underperformed although there has not yet been a strong pick-up in demand for safe haven currencies. The CHF has been only the fourth best performing G10 currency while the yen has been the second worst. The USD could suffer the sharpest sell-off against the JPY if the US AI/tech sell-off intensified potentially triggering a squeeze of elevated short JPY positions.       

RECORD FOREIGN DEMAND FOR US EQUITIES PRIOR TO RECENT CORRECTION LOWER

USD/JPY DIVERGES FROM CARRY FUNDAMENTALS DRIVEN BY JAPAN POLICY CONCERNS

Weekly Calendar

Source: Bloomberg & MUFG GMR

Key Events:

• UK Chancellor Rachel Reeves is set to deliver the much anticipated Autumn Statement in the week ahead. It has been reported that the government has a smaller fiscal hole to fill of around GBP20 billion and is seeking to raise fiscal headroom from GB10 billion to around GBP15 billion. It will require a package of tightening fiscal measures but is now unlikely to include an income tax hike. The decision to drop an income tax hike has cast doubt on the credibility of the government’s fiscal plans. Revenue raising measures are expected to be more back-loaded.
• The RBNZ is expected to lower rates by a further 25bps to 2.25% in the week ahead. The case for lower rates has been encouraged by weakness in the labour market. The unemployment rate hit a fresh cyclical high of 5.3% in Q3. At the last policy meeting, the RBNZ stated that “it remains open to further reductions”. With the policy rate moving further into stimulative territory, it is possible that the RBNZ indicates they are becoming more comfortable that they have lowered rates enough for now indicating at least a temporary pause.
• The main economic data releases in the week ahead include: i) the US retail sales report for September, ii) the Australian CPI report for October, iii) the US GDP report for Q3, iv) the US PCE deflator report for October, v) the German CPI report for November and vi) the Canadian GDP report for Q3. The data will provide a further insight into the health of the US economy heading into year end. The US GDP report is expected to confirm that stronger US growth continued in Q3 after the pick-up in Q2 before the record government shutdown is expected to temporarily dampen growth in Q4.