FX Weekly

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USD doubts as IEEPA struck down

FX View:

The US dollar advanced last week with US economic data and the FOMC minutes from the January meeting prompting investors to pare back rate cut expectations for this year. After a period of terrible sentiment for the dollar in January, FX positioning looks to have become excessive and short dollar positions being unwound has likely reinforced the dollar rebound. This week we look at Japan, the yen and BoJ following the opening of parliament and a policy speech by PM Takaichi on Friday. We also give our initial take on the Supreme Court ruling on Friday against the use of IEEPA to implement reciprocal tariffs globally. President Trump called the decision a “disgrace” and has indicated that there is a Plan B ready to go. No matter, this development creates renewed uncertainties, mainly for US companies and households and hence we believe the Supreme Court ruling is a mild negative for the dollar. President Trump’s negotiating leverage has clearly also taken a hit which could add to policy unpredictability ahead.

NEAR BROAD-BASED USD STRENGTH AS FED RATE CUTS GET PARED

Source: Bloomberg, 16:00 GMT, 20th February 2026 (Weekly % Change vs. USD)

Trade Ideas:

We have no outstanding trade recommendations.

IMM Positioning: 

The latest positioning data for the week ending 17th February revealed that Leveraged Funds have cut back short JPY positions to the lowest level since last summer.

Weekly Calendar:

This week will be less about the incoming data (not much top-tier data) and more about central bank speakers. ECB President Lagarde could confirm her plans while BoE Chief Economist Huw Pill will speak Friday. A hawk, any shift in tone toward the prospect of a rate cut would be significant and cement expectations of a BoE rate cut on 19th March.

FX Views

USD: IEEPA struck down creating renewed uncertainty

We believe there are numerous factors that will unfold this year and lead to further US dollar depreciation. One of those factors was the view that the Supreme Court would strike down the IEEPA reciprocal tariffs which in turn would create renewed trade policy uncertainty and that would be particularly so for US companies and household. In a 6-3 vote on Friday, the Supreme Court ruled that President Trump had exceeded his authority in introducing the reciprocal tariffs under IEEPA. The ruling did not address the extent to which importers will be entitled to refunds for tariffs already paid. The US Customs and Border Protection data indicates that about USD 170bn of tariff revenues have been collected with USD 134bn through IEEPA. That is data through to 14^th December so Bloomberg calculates using a daily average collection rate that IEEPA-related revenues amount to USD 170bn. Justice Bret Kavanaugh wrote the dissenting summary and described the process of repayment was likely to be a “mess”. Unsurprising, President Trump is furious and described the decision as a “disgrace” while adding that the White House had a back-up plan.

Trump quickly confirmed that Plan B would be Section 122 of the Trade Act of 1974. This allows for the US to implement a 15% tariff for a period of 150 days in order to protect the US from excessive trade deficits. The advantages of Section 122 is that it can be implemented without an investigation period and can be all-encompassing across a wide number of countries. The disadvantages from President Trump’s perspective is that it is for a max of 150 day and no more than a tariff rate of 15%. Extension in period requires congressional approval.

The reaction in the FX market has been modest but UST bond yields have risen reflecting concerns over the need to repay as much as USD 170bn. If Section 122 is utilised across a smaller number of countries it could mean the effective tariff rate comes down and may ease inflationary pressures. This could translate to curve steepening which could be consistent with US dollar depreciation. We would argue that this creates most uncertainty for US companies and hence could add to a reluctance to hire or invest until there is clarity and a final status. Section 122 would therefore ensure a level of uncertainty given the 15% tariff announced can only last for 150 days. Brazil, China, India, Canada and Mexico will experience the biggest reductions in tariff rates providing support for domestic growth and their currencies.  

Overall, we expect the negative impact of heightened trade policy uncertainty to dominate USD performance in the near term. Lower tariffs support our view that the Fed will cut rates further this year as inflation falls back toward target. We expect these negative factors to outweigh support for US growth and the USD from tariff refunds.

SUBSTANTIAL TARIFF REPAYMENTS LIKELY

Source: Bloomberg, Macrobond & MUFG GMR

OVERALL EFFECTIVE TARIFF RATE TO COME DOWN

Source: Bloomberg, Macrobond & MUFG GMR

JPY: Takaichi reinforces message of fiscal responsibility

From the intra-day low last week, USD/JPY has rebounded three big figures that suggests the post-election yen buying on the liquidation of shorts has run its course and could open up scope for further gains over the short-term. The checking of rates in USD/JPY by the Federal Reserve in January has also deterred any aggressive renewed yen selling although as time passes the impact of that will likely fade. For now though, the relative stability in the JGB market has removed one source of previous yen selling that could also limit the scope to the upside. However, geopolitical risks could change all of that suddenly. The US dollar has gained broadly this week, in part of better US data and reduced Fed rate cut expectations but also on prospects of a renewed attack on Iran by the US. This did not materialise this weekend but President Trump has stated that Iran has 10-15 days to make a deal. That will keep investors focused on this risk this week. In June 2025 when the US attacked Iran’s nuclear facilities, USD/JPY advanced around 3.5% in the run up to and immediately after the attack. A crude oil surge is clearly a negative for the yen that could yet encourage renewed selling, especially if the US dollar remains broadly supported across G10.

The reconvening of the Diet after the general election took place on Friday and with that PM Takaichi delivered a keynote speech outlining the government’s policies ahead. The market reaction was relatively muted and the general details were consistent with previous comments on policy focus ahead. The relatively stability in the JGB market was also helped by the nationwide CPI data that came in weaker than expected. The speech itself focused on a number of key issues, particularly – 1) a national defence strategy; 2) economic security; and 3) an investment-led economic strategy. On defence Takaichi repeated a commitment to increase spending in order to “fundamentally strengthen our defence capabilities”. While the policies on defence would not be directed at any one country Takaichi also stated that China was stepping up attempts to change the status quo “by force or coercion”. Economic security would be strengthened via a toughening of screening on foreign investments and a review of rules governing the purchase of land by foreigners. Takaichi also committed to strengthening rare earth supply chains, like the area around Minamitori.

From a JGB perspective, investors liked the mention in the speech of moving away from the short-termism and dependence on supplementary budgets and adopting policies that improve predictability for local governments and businesses. We may well have seen our last supplementary budget in December and moving toward a more investment-led fiscal policy approach would certainly be more accepted by JGB investors. Importantly, PM Takaichi called for the early enactment of the FY2026 budget asking for “prompt deliberation” by the end of this fiscal year. The Diet budget committee held a meeting on Friday and the LDP proposed a date of 13^th March but that as of yet has not been agreed to by opposition parties. We will watch this closely but having the budget passed and the full details therefore known will certainly increase the prospects of the BoJ being in a position to raise the policy rate at the April meeting. PM Takaichi did also mention studying the policy of suspending the sales tax for two years but emphasised this would be studied so that the issuance of deficit-financing bonds is avoided.

JGB CURVE STEEPENING HALTED FOR NOW

Source: Bloomberg, Macrobond & MUFG GMR

JAPAN MANUFACTURING PMI SURGES TO 2022 LEVELS

Source: Bloomberg, CFTC, Macrobond & MUFG GMR

The policy focus laid out on Friday to keep pushing for growth and to drive investment-led fiscal spending will likely mean the BoJ will be required to tighten its monetary stance. The probability of a hike at the meeting on 28^th April is currently about 70%. If the FY26 budget is passed by then and USD/JPY remains around current levels, the pressure will intensify for the BoJ to act. The policies of PM Takaichi look to be quickly having an impact on sentiment. The Manufacturing PMI jumped to 52.8 in February, the highest since May 2022. We see the government giving more freedom to act as a quid-pro-quo in helping stabilise the JGB market. Washington may also be applying pressure for the BoJ to act and getting the yen on a firmer footing after the Fed checked rates in January will be part of that. Next week may be when the government announces its picks to replace two BoJ Board members – Asahi Noguchi and Junko Nakagawa. Both on the dovish side of the spectrum and hence we could see overall balance of the Board turn a bit more hawkish. The nationwide CPI data on Friday was a little weaker than expected but we do not see that altering the prospects of an April rate hike – continued weaker prints would certainly put doubts on further hikes but not at this stage when the policy stance still requires further tightening. Getting to a zone of R* is still some distance away and hence a hike by April is still required in our view.

As stated above, the broader strengthening of the dollar and the completion of JPY short position liquidation has helped USD/JPY rebound by about three big figures from the intra-day low last week. An escalation of geopolitical risks is an obvious near-term risk that could encourage extended yen selling. Takaichi’s policy speech on Friday did not trigger any JGB selling but the tone of the remarks were still consistent with a focus on spending and growth. There remains a risk of concerns growing if investors become sceptical over the ability to contain JGB issuance. If crude oil prices advance further over the short-term it will likely put upward pressure on global yields and potentially encourage further yen selling. Still, the tone of rhetoric from the BoJ is likely to continue to be more hawkish, especially if the yen weakens further which should encourage expectations of an April hike and curtail the scope of yen selling at weaker levels. The threat of MoF intervention will also increase notably.

CRUDE OIL & USD/JPY – CO-MOVEMENT BROKE DOWN

Source: Bloomberg, Macrobond & MUFG GMR

BOJ POLICY RATE IN REAL TERMS TO SLOWLY RISE

Source: Bloomberg, Macrobond & MUFG GMR

Weekly Calendar

Source: Bloomberg & MUFG GMR

Key Events:

• This week gets off to a busy start in terms of central bank speakers with BoE’s Alan Taylor, Fed Governor Waller and ECB’s Lagarde all speaking today. Governor Waller was on the dissenters at the last FOMC meeting in January so his comments will likely be dovish – but how aggressively will be push back against the recent pricing of a longer pause in the monetary stance? ECB President Lagarde’s comments will also be in focus following the media reports last week that she intends to leave her post early. Monday is unlikely the day for that given Lagarde is in Washington to pick up an award. But Lagarde also speaks on Thursday morning in the EU parliament which is a more likely backdrop if an early departure from the ECB was confirmed. The Wall Street Journal quotes Lagarde as confirming she will remain for the full 8-year term. BoE Chief Economist Huw Pill will also speak this week – on Friday. A hawk, so his comments will be key to gauge whether last week’s weaker jobs data and drop in headline CPI will be enough to persuade him to support a rate cut in March.
• The final CPI data estimates for the euro-zone will be released along with the Tokyo and France CPI and the US PPI data – so key economic releases this week will have an inflation focus. US Consumer Confidence will also be released with a focus on expectations of labour market conditions. Next week will see the release of more top-tier data (ISM and NFP) so financial market reaction to data releases this week will unlikely be significant.