FX Weekly

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Positive USD momentum may ease after weak CPI

FX View:

The US dollar is modestly weaker in the response to this afternoon’s US CPI report for September. UST bond yields are lower but the reaction has been contained given the market was already fully priced for a rate cut from the FOMC next Wednesday. In addition, while services inflation slowed, mostly due to a notable slowdown in rents, (OER specifically), there were also signs of tariff-related inflation pressures in the goods sector. After the FOMC on Wednesday, the BoJ will announce its policy decision on Thursday and given the new political leadership team under PM Takaichi, the BoJ will refrain from hiking. How much clarity on policy may leave it difficult for BoJ Governor Ueda to offer much explicit guidance. Today’s PM Takaichi gave a speech in the Diet outlining the policy focuses for the new government. Increased fiscal spending and additional JGB issuance appears likely although there was no mention of a sales tax cut which has helped alleviate fiscal concerns and limit further yen selling at these elevated levels in USD/JPY.

MIXED PERFORMANCE FOR US DOLLAR AS YEN UNDERPERFORMS AGAIN

Source: Bloomberg, 13.45 BST, 24th October 2025 (Weekly % Change vs. USD)

Trade Ideas:

We are maintaining long EUR/GBP and short CAD/CHF trade ideas.

JPY Flows: Balance of payments: :

The Balance of Payments data for August revealed a shrinking goods and services trade deficit and bond flow data revealed modest net flows into the US and Europe.

FX Correlation Heatmaps:

Our cross-asset correlation heatmap indicates weakening G10 FX correlations with US rates while the strongest correlation for USD/JPY is now crude oil. Clearly, the latest US sanctions on Russian oil companies that lifted crude oil prices is a negative development for the yen. Brent is up over 8% this week with the yen lagging in the G10 FX performance table.

FX Views

JPY: Takaichi’s speech, JGBs & a key week ahead

The post-Takaichi leadership victory high of 153.27 for USD/JPY is back in sight again and a breach of this level would take us to levels we haven’t seen since February of this year, making a test of the 155-level all the more likely over the coming trading sessions. Following today’s speech in the Diet by PM Takaichi, which we assess below, and the CPI data in the US, next week will be a key week for USD/JPY with the visit to Japan of President Trump from Monday through to Wednesday which will then be followed by the FOMC policy announcement on Wednesday evening and the BoJ policy announcement on Thursday. President Trump will meet Emperor Naruhito at the Imperial Palace on Monday which will be followed on Tuesday by a summit meeting and lunch with PM Takaichi. The US-Japan security alliance, Indo-Pacific strategy, and trade and trade agreements are the topics for discussion. Trump will have other visits including a tour of a US navy base and will depart on Wednesday for South Korea. Security and economic cooperation will likely dominate discussions and in that context, the new administration in Tokyo would probably prefer this first meeting not to be accompanied by a backdrop of extended depreciation of the yen.  

PM Takaichi today gave a speech to the Diet outlining the policy agenda ahead. Takaichi outlined the basic policy steps to strengthen the economy. Measures against rising prices; crisis management investment via the creation of a ‘Japan Growth Strategy Council’; food and energy security; disaster prevention measures; health and medical security; diplomacy and security; and amending the constitution were the main topics presented in the speech. The yen did weaken modestly during the speech – the intra-day high in USD/JPY (153.06) today was just after the details of the speech were released and the focus was on the aim to “increase tax revenue without raising tax rates” which would “restrain the growth rate of debt within the growth rate of the economy”. This certainly fuelled expectations of more aggressive fiscal spending – super-long JGB yield ticked up a little higher as the yen weakened modestly but the overall reaction to the speech was modest. JGB yields still closed modestly lower on the day and USD/JPY is only around 0.2% higher. The more subdued reaction to the speech despite signalling increased spending likely reflects the absence of a reference to a cut in the sales tax on food – a key Ishin Party policy demand. This suggests a possible more cautious fiscal spending plan overall than had been expected.

Our Tokyo research colleagues led by Teppei Ino estimate possible additional JGB issuance of JPY 7-8trn based on the current estimate of surplus tax revenues in the current fiscal year of around JPY 2.7trn (Cabinet Office estimate in August). This is making assumptions like the overall package being of a similar to size to last year (JPY 13.9trn). It’s very likely that any additional JGB issuance will be very much focused at the front-end of the yield curve. Finance Minister Katayama also spoke earlier today stating that it “can’t be helped” if more JGBs are required for a supplementary budget. Katayama also played down Scott Bessent’s perceived opposition to yen depreciation via BOJ policy accommodation stating that Bessent was an “admirer of Abenomics”. We should gradually get further information on the composition and size of the fiscal package but the most significant take-away is the absence of the sales tax cut on food in Takaichi’s speech suggesting a more conservative package than initially assumed.   

2S10S JGB SPREAD WIDENING & USD/JPY HIGHER

Source: Bloomberg, Macrobond & MUFG GMR

RATES SPREAD FAILING TO TAKE USD/JPY LOWER

Source: Bloomberg, Macrobond & MUFG GMR

The vulnerability of the super-long end of the JGB market remains a focus and curve steepening has been a trend that has coincided with yen depreciation. The lack of buying by some of the key domestic investors was evident in the JSDA monthly JGB flow data for September. Japan Life & Non-Life Insurance companies sold JPY 226bn worth of super-long JGBs in September, the third month of selling in the last four. City banks sold JPY 210bn; regional and Shinkin banks were sellers as were Investment Trusts. The only notable domestic buyer was Trusts, which bought JPY 530bn which would cover pension funds, like GPIF. GPIF asset composition changes recently does point to an increase in domestic bond holdings. Again though, like in previous months, foreign investors were the notable buyer of super-long JGBs, buying JPY 1,276bn in September. City banks can match their liabilities with JGBs of shorter tenors while the Economic Value-Based Solvency Ratio (ESR) adopted, that is effective this fiscal year, leaves Life Insurance companies more sensitive to interest rate risk that results in a greater incentive to match asset and liabilities. That has already been largely completed by Lifers leaving them sidelined with the bulk of buying undertaken by foreign investors. The initial spike in yields and then the retracement back lower this month may indicate foreign investors were again buyers of super-long JGBs on dips (in price) in October after Takaichi’s leadership election victory.

There is now less than 3bps priced for a cut from the BoJ next week so in reality the focus at next week’s meeting will be on the communication and whether Governor Ueda will signal a rate hike is still on the agenda and how explicitly he signals the chance of a rate hike at the next meeting. I think it is very likely that broad message will be the same – that if the economy continues to evolve in line with the BoJ’s outlook, it will need to hike again. Today’s inflation data and the Rengo initial wage demand of 5.0% for next fiscal year are both likely to provide confidence for the BoJ to convey the same key message. However, given Governor Ueda’s cautious style and the relatively new political environment, a strong signal on timing is unlikely. So the catalyst for the yen to rebound from current weaker levels will likely come from the US side. Today’s CPI data was weaker than expected but not weak enough to drive big FX moves. We still see weak US labour market data as the key catalyst to a lower USD/JPY.

KEY DOMESTIC INVESTOR BUYING LESS S-LONG JGBS

Source: Bloomberg, Macrobond & MUFG GMR

CK-UP IN FOREIGN INVESTOR BUYING S-LONG JGBS

Source: Bloomberg, Macrobond & MUFG GMR

Weekly Calendar

Source: Bloomberg & MUFG GMR

Key Events:

• The Fed is expected to lower rates by 25bps for the second consecutive meeting amidst the ongoing US government shutdown that has limited the release of data providing insights into the health of the US economy. Recent comments from Fed officials, including Chair Powell, have signaled that they believe that not much has changed recently and the US labour market remains weak. Today’s CPI report will only reinforce the Fed’s confidence to cut. However, we expect Fed Chair Powell to emphasize that policy decisions remain data dependent. The Fed should have more information by the December FOMC meeting to see if the divergence between stronger US growth and weak US labour market has continued. The Fed could also announce an end to QT as early as next week.

• The BoC is also expected to lower rates by 25bps for the second consecutive meeting. However, there is a higher risk that the BoC may delay next week than the Fed. Firstly, Canadian economic data releases this month have been stronger than expected including the rebound in employment growth and pick-up in core inflation in September. Secondly the BoC’s policy rate is already much lower than for the Fed reducing the need for faster rate cuts.           

• The BoJ is expected to leave rates on hold in light of recent political uncertainty in Japan and the lack of US economic data releases this month. The updated guidance should emphasize that they could still resume rate hikes this year if their economic outlook is realized. It has been reported that the GDP forecast for this year is likely to be revised higher.

• In contrast, the ECB’s upcoming policy meeting should be more of a holding operation. The ECB is expected to leave rates on hold for the third consecutive meeting. While the ECB is likely to leave the door to further rate cuts, we are not expecting President Lagarde to indicate that another rate cut is likely this year which validates current market pricing that the ECB will leave rates on hold at least until the middle of next year.