FX Weekly

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USD set to advance further

FX View:

The US dollar weakened last week with crude oil prices remaining elevated on the hope that President Trump would soon de-escalate. US dollar buying reversed last week in part on the substantial increase in front-end yields outside of the US with the ECB and BoE now expected to tighten policy notably. However, yield differentials are unlikely to be a reliable driver of FX in times of turmoil and we continue to expected further dollar appreciation. The 48hr ultimatum by President Trump for Iran to open the Strait of Hormuz or face obliteration of power facilities passes tonight at 23:45 GMT and markets are likely to remain on edge as that deadline approaches and passes. Iran has threatened retaliation which could mean a sharp escalation in the conflict this week. Risk-off trading conditions are likely to intensify and we can only see this resulting in renewed US dollar strength.

USD REVERSES SOME OF POST-CONFLICT STRENGTH

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

Trade Ideas:

We are maintaining a short EUR/USD trade to reflect the risk that the energy price shock will intensify further.

JPY Flows: 

The weekly cross-border flow data to 13th March revealed further selling of foreign bonds but increased buying of foreign equities. Leveraged Funds yen short positions have increased since the start of the conflict.

FX Weekly Options Flow Report:

This week, as the Middle East conflict continues, our DTCC‑based framework found stronger demand for USD calls against both the EUR and GBP, but flows were more mixed for JPY.

FX Views

JPY: Do recent yen moves reflect fundamentals?

Since Friday 13^th March we have had five separate occasions when Finance Minister Katayama has spoken specifically on foreign exchange, indicating that the government was concerned over the level of the yen and implying that there was a high threat of intervention. Last Monday, Katayama stated that the recent moves of the yen did not reflect the fundamentals and that the MoF would “fully respond” to excessive yen moves. Since the conflict in the Middle East began, the yen has weakened by close to 2.0% versus the US dollar – that rests middle-table in the G10 performance table. The Swedish krona is down by close to 3.5% and is the worst performing G10 currency while the Canadian dollar is the best performing after the US dollar, down just 0.1%. The FX market in general has traded broadly as you would expect although perhaps the dollar has not advanced as much as we would have expected but the difference is marginal. CAD, AUD and NOK are three of the top four performing which makes sense from a terms of trade perspective while GBP, for now, is being helped by yield and is the third best performing G10 currency. Are FM Katayama’s comments justified? We think not and it is worth remembering that there are numerous fundamental factors to explain yen weakness, many of which will be more compelling if the Middle East crisis drags on the energy prices move further higher.

The yen rebounded last Thursday in response to the BoJ policy announcement and Governor Ueda’s press conference. However, nearly the entire move reversed on Friday and it’s clear that short-term short yen positions were liquidated on Thursday given Governor Ueda was not as dovish as expected but the speed in which that move reversed underlines the near-term deterioration in yen fundamentals. An obvious one is the terms of trade implications for Japan from the conflict. While natural gas prices have not jumped as much as in 2022, crude oil prices have and there is still a high risk of further prices increases. In 2022, Japan’s energy trade deficit on a 12mth sum basis widening from JPY 10trn in March 2021 to JPY 33trn in March 2023, covering the post-covid rebound in energy prices and Russia’s invasion of Ukraine. If you assume a far smaller worsening on this occasion (40% of 2022-23) you still see an energy deficit expansion potentially ahead of nearly 1.4% of GDP on an annual basis.

In January, prior to the conflict there had been increased expectations of global investors looking to increase hedging of US dollar exposure. US dollar sentiment was terrible and the dollar fell sharply. The Fed was expected to cut three times in 2026 which would further encourage hedging via reduced hedging costs. That is no longer the case. Firstly, the terms of trade shock will naturally reduce expectations of a lower USD/JPY while the Fed is now priced at just 50% chance of one cut. In Europe, both the ECB and the BoE are now priced to potentially deliver three to four 25bp rate hikes while the RBA has already delivered two with three more hikes now expected. Global yields are again diverging from Japan and hedging costs are rising not falling which reinforces short-term downside risks for the yen.

JAPAN ENERGY TRADE BALANCE SET TO WIDEN AGAIN

Source: Bloomberg, Macrobond & MUFG GMR

USD/JPY OVER 2YRS FROM RECENT INTERVENTION

Source: Bloomberg, Macrobond & MUFG GMR

The overriding change in Japan post-covid has been sustainable inflation. This also coincided with a structural change in Japan’s labour market – declining working age population that resulted in much higher nominal wage growth. Now with another inflation shock of some magnitude not fully known yet, real yields in Japan will take another lurch lower. We also can be quite confident that the BoJ will be cautious on hiking nominal yields. Higher wages lifting inflation and depressing real yields is one factor but there has also been a structural shift in Japan’s balance of payments. The chart below highlights the change in the composition of Japan’s current account surplus. Pre-2011 Japan’s trade surplus was a large part of the overall surplus. Now the record surplus is dominated by the investment income surplus. Much of that inv income surplus is FDI, which is not converted back to yen. Export revenues tend to see much higher FX conversion rates and hence Japan’s record current account surplus is no longer providing the support like in the past.

Overall cross-border flows do not point to any particular shift to greater outflows to explain yen weakness. However, within the flow data when we look specifically at Investment Trust flows (associated with NISA – household tax free savings accounts) we can see a substantial increase in outflows from Japan. The tripling in size of the NISA limit since the start of 2024 has seen a big increase in foreign asset buying that tends to be largely unhedged. In the 26mths since the change, Inv Trust purchases of foreign equities totalled JPY 21.2trn. In the same 26mth period prior to the NISA limit change the equity buying totalled JPY 8.5trn – so there has been a 2.5 times increase in mostly unhedged foreign equity buying.

This backdrop certainly undermines the view of FM Takaichi that the yen moves do not reflect fundamentals. The hope must be that rhetoric will cap the upside. But as is always the case, rhetoric loses its value over time and if we see further energy price rises this week (more likely than not) then USD/JPY will be through the key level and testing the 2024 high of 161.95. Given the Fed checked rates in USD/JPY in January and given Washington is probably unhappy with the strength of the dollar, there is certainly a plausible scenario of joint intervention although we see that scenario only as a risk. Sole intervention will have the usual initial impact but will be even more challenging to achieve success than in the recent previous episodes.

STRUCTURE OF JAPAN’S EXTERNAL SURPLUS CHANGED

Source: Bloomberg, Macrobond & MUFG GMR

INV TRUST BUYING OF FOREIGN EQUITIES IS STRONG

Source: Bloomberg, CFTC, Macrobond & MUFG GMR

CHF: How are the CHF & SNB reacting to the Middle East conflict?     

The CHF has unexpectedly underperformed since the Middle East conflict began on 28^th February. It has been the third‑worst performing G10 currency after the NZD and  SEK, weakening by around 3.0% against the USD. As a result, USD/CHF has climbed back toward resistance from the 200‑day moving average near 0.7950, after having reached a low just above 0.7600 earlier this year. Instead of benefiting from safe‑haven demand, the CHF has underperformed alongside other European currencies, despite the sharp rise in geopolitical risks in the Middle East and global inflation shock driven by energy supply disruptions. While it is still early to fully assess the market fallout from the conflict, the initial price action contrasts with the response during the previous energy price driven global inflation shock in 2022 triggered by the outbreak of the Ukraine war. At that time, the CHF was the second‑best performing G10 currency after the USD in 2022, while the SEK was again the weakest.

One key reason for the CHF’s underperformance since the Middle East conflict began has been the SNB’s strong pushback against currency strength. The SNB acted quickly on 2^nd March, issuing a statement emphasising that its “willingness to intervene in the foreign exchange market has increased” and that it stands ready to counter “a rapid and excessive appreciation of the Swiss franc.” According to Reuters, the last time the SNB released a similar warning was in 2016 following the UK’s Brexit vote. The message was reinforced at the SNB’s latest policy meeting last week, when the Bank again stated: “Given the conflict in the Middle East, the SNB’s willingness to intervene in the foreign exchange market has increased. The SNB thereby counters a rapid and excessive appreciation of the Swiss franc, which would jeopardise price stability in Switzerland.” During the accompanying press conference, SNB President Schlegel noted that the trade‑weighted CHF had risen by around 2.5% since mid‑December, tightening monetary conditions. He highlighted that Switzerland’s accord with the US Treasury allows the SNB to intervene to protect price stability, and warned after signalling a high readiness to act, that “you’ll see” what comes next.

The last time Switzerland officially confirmed FX intervention to weaken the CHF was in Q2 2025, following President Trump’s “Liberation Day” tariffs announcement, when the SNB purchased CHF 5.06 billion of foreign currency. This was similar in scale to the intervention at the start of the Ukraine conflict in Q1 2022, when the SNB bought CHF 5.74 billion to counter CHF strength. Recent price action has fuelled speculation that the SNB may already have stepped back into the FX market, contributing to the CHF’s recent underperformance. EUR/CHF briefly threatened to break below 0.9000 on several occasions earlier this month but failed each time—potentially suggesting that the SNB was defending that level. Notably, the low in EUR/CHF on 9^th March coincided with Brent crude oil hitting a peak of USD 119.50 per barrel, a level that has not been surpassed despite subsequent military strikes on Middle Eastern energy sites. The failure of energy prices to make fresh highs over the past week may itself have contributed to the weaker CHF, even without direct intervention by the SNB.

CHF OUTPERFORMED DURING LAST ENERGY SHOCK

Source: Bloomberg, Macrobond & MUFG GMR

CHF & GOLD INITIALLY HIT BY MIDDLE EAST CONFLICT

Source: Bloomberg, Macrobond & MUFG GMR

The SNB is likely to be more sensitive to a stronger CHF than during the last energy price/inflation shock in 2022. The starting point for inflation in Switzerland prior to the Middle East conflict was much lower at 0.1% in February compared to prior to the Ukraine conflict in February 2022 when it was at 2.2%. It was a similar story for core inflation although the differential was less pronounced. Core inflation in February 2026 was at 0.4% compared to 1.3% in February 2022. The softer inflation outlook was reflected in the SNB’s latest forecasts. The SNB expects inflation to average 0.5% for both 2026 and 2027 after incorporating higher energy prices. Whereas at the March 2022 policy meeting, the SNB forecast inflation at 2.1% for 2022 and 0.9% for 2023. The SNB then quickly acknowledged that they had underestimated the inflationary impact from the Ukraine conflict-related energy price shock when the inflation forecasts were raised significantly at the next policy meeting in June 2022 to 2.8% (+0.7ppt) for 2022 and 1.9% (+1.0ppt) for 2023. It marked the start of the SNB’s tightening cycle. In light of the softer outlook for inflation, the SNB is still indicating that they could also lower rates back into negative territory as another option to weaken the CHF alongside intervention but continues to emphasize that there is a “higher threshold”. With upside risks to inflation from the energy price shock increasing, a rate cut back into negative territory appears even less likely now. The Swiss rate market has even started to price in between one and two SNB rate hikes for this year. It leaves intervention as the main/only viable policy option to dampen CHF strength.

While the CHF has weakened since the Middle East conflict began, we remain unconvinced that this recent trend will persist. If the energy‑price shock intensifies and results in a more disruptive outcome for the global economy, initial CHF weakness is likely to reverse. In such a scenario, safe haven demand driven by heightened geopolitical risks and rising fears of global stagflation would likely outweigh concerns about SNB intervention. The SNB could also become more tolerant of CHF strength if inflation were to surprise significantly to the upside. During the last major energy price shock, the SNB even shifted to buying CHF rather than selling it between Q4 2022 to Q4 2023 to help dampen inflation risks. However, with inflation starting from a much lower rate this time, a similar policy response currently appears less likely.

TWI CHF VS. SNB FX INTERVENTION

Source: Bloomberg, Macrobond & MUFG GMR

LOWER STARTING POINT FOR SWISS INFLATION

Source: Bloomberg, Macrobond & MUFG GMR

Weekly Calendar

Source: Bloomberg & MUFG GMR

Key Events:

• The primary focus in the week ahead will remain on the conflict in the Middle East, which continues to be the key driver of FX market performance. The recent military strikes on energy infrastructure across the region have heightened the risk of a more disruptive energy‑price shock. President Trump has set a 48 hour deadline for later today to pressure Iran to open the Strait of Hormuz.
• The ECB will hold its annual Watchers Conference in Frankfurt this week. The programme includes a speech from President Lagarde, while Chief Economist Lane will participate in a debate on monetary policy. Market participants will be listening closely for any further insights into how the ECB intends to respond to the recent energy price shock. The euro‑zone rates market has already moved to price in two 25bps hikes from the ECB by year‑ Natural gas prices in Europe have almost doubled since the Middle East conflict began, posing upside risks to near‑term inflation and downside risks to growth. The negative impact of higher energy prices on business confidence in Europe should become evident in the week ahead, when the latest March PMI surveys for both the euro‑zone and the UK are released.
• The main economic data releases in the week ahead will be the latest CPI reports from Japan (Mon), Australia (Wed), and the UK (Wed). All three cover the month of February, prior to the start of the Middle East conflict. In light of the ongoing energy price shock, market participants are likely to place greater-than-usual weight on the monthly inflation readings. Both the RBA and the BoJ signalled over the past week that they are prepared to raise rates further, while the BoE has indicated that the scope for additional rate cuts has diminished. This shift favours keeping rates on hold for longer.
• The Norges Bank is expected to leave rates on hold this week. Market participants will be watching closely to see whether policymakers maintain their guidance that the policy rate “will be reduced further in the course of the year.” Prior to the recent energy price shock, the Norges Bank had been pencilling in one or two cuts in 2026. The inflationary impact of higher energy prices is now being partly offset by a significantly stronger NOK. The Norwegian rates market currently judges that a hike is now more likely than a cut as the next policy move.