FX Weekly

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Risk aversion could be set to rise

FX View:

The euro, pound and yen were the top performing G10 currencies last week (after the US dollar) while the Australian dollar was the worst performing. Friday saw global equities fall more notably and that continued in Asia today with front-end yields dropping as investors pare back expectations of rate hikes. This type of price action could be the early signs of a shift in dynamic to more risk-off as investor focus shifts from inflation concerns to growth concerns. There are no obvious signs at this moment of any de-escalation and a break above the 120-level in Brent could be the catalyst for increased volatility and broader risk aversion. The VIX is trading above the 30-level for the first time since the conflict began. We would expect the pound to suffer and underperform while the lagging Swiss franc should see better performance, possibly along with the yen, helped by possible intervention as Tokyo ups the rhetoric opposing yen depreciation.

USD BROAD-BASED GAINS WITH EUR, GBP & JPY MORE RESILIENT

Source: Bloomberg, close on 27th March 2026 (Weekly % Change vs. USD)

Trade Ideas:

We are recommending new short GBP/CHF trade idea, and maintaining a short EUR/USD trade to reflect the risk that the energy price shock will intensify further.

JPY Flows: 

The monthly Balance of Payments data revealed some seasonal decline in the current account surplus and modest buying of foreign bonds.

FX Fair Value Modelling:

Across G10, EUR/USD and GBP/USD remain over-valued vs. model‑implied fair value, while USD/JPY is closer to fair, with oil sensitivity emerging as an increasingly important marginal driver.

FX Views

JPY: Are fiscal concerns about to re-emerge?

Let us first provide some updated thoughts on the prospects of intervention. USD/JPY broke through the 160-level on Friday but from an intra-day high of 160.46 earlier today the yen has strengthened in response to a clear upturn in more aggressive rhetoric from Tokyo threatening intervention. Vice Finance Minister for International Affairs Mimura stated that “we are hearing that speculative activity is on the rise” and added that if that was to continue then “it will soon be necessary to take decisive action”. This is the clearest rhetoric yet on the imminent threat of inflation. The move was reinforced by comments from Governor Ueda in the Diet who stated that FX was more important in shaping direction for inflation. His comments were a clear hint of possible monetary tightening with longer-term yields also a focus. Governor Ueda argued that long-term yields could rise further if the BoJ was to delay a rate hike and in turn fuel concerns over inflation. This is the clearest acknowledgement from Governor Ueda that the BoJ may need to respond to concerns over the BoJ being behind the curve. A rate hike would certainly help to improve the chance of successful intervention given past interventions over time fade as is evident from the previous more recent episodes of intervention that have by now been fully retraced.

As we approach the fiscal year end in Japan we find ourselves in the unusual position of not having the initial budget for FY2026 passed yet. This primarily is a result of the dissolution of parliament in order to hold the general election, that PM Takaichi and the LDP won resoundingly. However, the Upper House remains the same and the LDP does not hold a majority and hence opposition parties are demanding more time to pass the initial budget. So this issue does not reflect to any fundamental fiscal policy differences and is more related to principle on allowing the normal time for consideration. Some members are therefore not attending committee hearings, slowing the process further. The Constitutional Democratic Party of Japan had also insisted a provisional (stopgap) budget needed to be considered before the initial budget is assessed. This has led to the government accepting this and today a  provisional stopgap budget was passed. This budget amounts to JPY 8.6trn covering the period until 11^th April when the passed initial budget in the Lower House will become law without Upper House approval.

Friday saw substantial selling of JGBs with the 30-year yield rising 19bps to close to 3.72%, and this extended by a further 7bps today. Inflation risks are the dominant driver here, like in other bond markets but investor concern over further fiscal slippage in Japan is also a factor. The LDP’s existing Comprehensive Economic Measures already promised to “provide assistance to reduce electricity and natural gas bills during the winter months”. There was no reference to scale suggesting the commitment could align with the latest surge in energy prices and therefore prove more costly than initially envisaged. Other tax measures could also be increased in order to help offset the hit from the rise in the cost of living. The likelihood of additional measures or an increase in the size of measures already announced is reinforced by the fact that the main opposition parties all support additional support measures.

JPY-BUYING INTERVENTION OF LATE HAS FAILED

Source: Bloomberg, Macrobond & MUFG GMR

USD/JPY HAS FULLY RETRACED PAST INTERVENTIONS

Source: Bloomberg, Macrobond & MUFG GMR

We see the energy price spike that is coming as reason to believe the BoJ will hike at the next meeting in April. We expect a 25bp hike to 1.00%. The caveat to that view is that there is no sharp global equity market fall and notable upturn in risk aversion. That would likely lead to front-end yields in G3 reversing some of the gains recorded since the conflict began that would likely see the yen reversing course and strengthening. The BoJ last Thursday announced a new CPI measure that excludes policy-driven factors like energy subsidies, covid-related policies and mobile phone charge reductions. So the nationwide CPI ex-fresh food and policy factors was at 2.2% in February – this compares to the 1.6% reported including policy measures. So the BoJ can argue that its official target is being achieved when policy factors are excluded. The BoJ also updated its estimated range for R* which is broadly unchanged at -0.9% to +0.5% (-1.0% to +0.5% prev). While the BoJ played down the importance of this measure, it does show that the current stance based on the new ex-policy nationwide CPI is still very accommodative with a real policy rate at -1.45%.

The BoJ’s Summary of Opinions from the March policy meeting was released today and it is clear that for some policy board members the expected upturn in inflation was a concern. The summary highlighted points including that the policy stance would need to tightened “without long lags between adjustments” and  “without hesitation”. The overall tone certainly underlined the fact that the focus was more on upside inflation risks rather than downside growth risks. Governor Ueda’s comments in the Diet today, mentioned above, also highlight a more hawkish stance. 

The emphasis in the much stronger tone of rhetoric today opposing further depreciation of the yen has had an impact in pushing USD/JPY lower today. The comments from Vice Finance Minister Mimura and Governor Ueda has ensured that there has been no follow-through selling on the break of the 160-level although if broader risk conditions were to remain resilient then a renewed test of highs and the resolve of the MoF is likely. But overall the upside scope seems limited. Renewed yen selling will likely be met by intervention or if global growth concerns intensify then global equities will likely take a bigger tumble, pushing front-end yields in the US lower and prompting a liquidation of long USD/JPY positions.

US-JP SWAP SPREAD RISE MORE MODEST THIS TIME

Source: Bloomberg, Macrobond & MUFG GMR

JAPAN INFLATION HEADING HIGHER

Source: Bloomberg, Macrobond & MUFG GMR

European FX: GBP resilience built on shakier foundations than for NOK    

The Middle East conflict has now been ongoing for over a month. During this period, the European currencies of SEK (-5.0% vs USD), CHF (-3.8%), and EUR (-2.7%) have been the worst performers within the G10 FX. At the other end of the spectrum, GBP (-1.8%) and NOK until recently had held up relatively better. The NOK’s initial outperformance was easier to justify than that of the GBP, given Norway’s position as a major energy exporter that stands to benefit, at least initially, from higher oil and gas prices. EUR/NOK fell sharply from around 11.800 at the start of the year and recently touched a low of 10.935, the weakest level since February 2023. The pair has been attempting to break out below the 11.000–12.000 trading range that has persisted in recent years. A similar pattern was seen at the start of the Ukraine conflict, when EUR/NOK initially dropped sharply between February and April 2022 before the NOK subsequently gave back those gains over the remainder of the year. Rising energy prices are likely to continue supporting NOK in the near term. However, a much larger oil price spike could eventually become less supportive if it heightens concerns over a sharper global slowdown or recession.

At the same time, the NOK has received near‑term support from the hawkish repricing of the Norges Bank’s policy outlook. At its latest policy meeting last week, the Norges Bank stated clearly that it “will likely be appropriate to raise the policy rate at one of the forthcoming monetary policy meetings.” This signals that the Norges Bank intends to be one of the first G10 central banks to respond to the energy price shock by tightening policy, helping to maintain the NOK’s position as one of the highest yielders in the G10 FX space. Prior to the energy price shock, the Norges Bank had been planning to cut rates once or twice this year. In its updated policy statement, however, the Bank emphasized that inflation has been “markedly higher” than projected, wage growth is expected to rise further, and higher energy prices will push up inflation both abroad and in Norway. Given that inflation has been above target for several years, the Norges Bank feels compelled to respond to the upside risks. The disinflationary impact of the stronger NOK will help dampen imported inflation, but it is not sufficient to alleviate the Bank’s concerns over persistent inflation pressures. As a result, the Norges Bank is planning to raise rates by 25–50bps in 2026.

NOK LIFTED BY IMPROVEMENT IN TERMS OF TRADE

Source: Bloomberg, Macrobond & MUFG GMR

EUR/NOK IS TESTING BOTTOM OF RANGE

Source: Bloomberg, Macrobond & MUFG GMR

The Norges Bank’s hawkish policy reaction function is similar to recent communication from the ECB. President Lagarde signalled clearly last week in her keynote speech at the ECB Watchers Conference that they “are prepared, if appropriate, to make changes to our policy at any meeting.” The ECB is waiting to obtain “sufficient information on the size and persistence of the inflation shock and its propagation.” She outlined three main scenarios for policy responses to the energy price shock. In the case of a limited and short‑lived shock, “the classical prescription of looking through should apply.” In the second scenario, a large but not‑too‑persistent overshoot, “some measured adjustment of policy could be warranted.” In the third and final scenario, where inflation shows a significant and persistent deviation from target, “the response must be appropriately forceful or persistent.” President Lagarde also noted that “the likelihood of a quick normalization is diminishing.” Her comments suggest the ECB is currently moving toward the second scenario of a large but not‑too‑persistent inflation overshoot. A “measured adjustment” would be consistent with the ECB delivering a couple of rate hikes. Our European economist (click here) has just revised his ECB policy forecasts to include back‑to‑back 25bp hikes at the next two meetings in April and June. The euro‑zone rate market has already moved to fully price in 50bp of tightening by July, with a third hike expected in the autumn to reflect the risk of more active policy action if near‑term inflation risks intensify further. The adjustment higher in euro‑zone rates is helping to provide some support for the EUR, but not enough to prevent it from weakening on concerns that the euro‑zone economy will be hit harder by the energy price shock.

The biggest hawkish repricing has occurred in the UK rate market in response to the Middle East conflict. This is one reason why GBP has been the second‑best performing G10 currency after the USD over the past month. The UK rate market has moved to almost fully price in three BoE rate hikes by year‑end. However, there has been some pushback against these more aggressive expectations over the past week. Dovish MPC member Taylor stated that the gilt market reaction “went a little bit too far” and noted that there is a high bar for raising rates. MPC members Greene and Breeden also acknowledged the risk of second‑round effects but emphasised that these risks are smaller than in 2022. Sarah Breeden judged that there are both upside and downside risks to the inflation outlook. A sharper slowdown and/or recession could ultimately be disinflationary beyond the near‑term boost from higher energy prices. Their comments follow Governor Bailey’s remarks after the last MPC meeting, in which he cautioned against drawing strong conclusions about the likelihood of further rate hikes. He stressed that rates are already high, demand is relatively soft, and there are no COVID‑related supply disruptions like in 2022. Taken together, the commentary appears more consistent with one or two BoE hikes by the summer. However, we are unconvinced that GBP’s recent resilience will be sustained. Higher UK yields are unlikely to prevent the currency from weakening further if stagflation risks continue to build in the UK. Our short‑term regression model suggests that the GBP should already have weakened further in response to the energy price shock. To position for catch‑up GBP weakness, we are recommending a short GBP/CHF trade idea.

UK YIELDS HIGHER THAN DURING LAST ENERGY SHOCK

Source: Bloomberg, Macrobond & MUFG GMR

CABLE VS. TERMS OF TRADE PROXY DIFFERENTIAL

Source: Bloomberg, Macrobond & MUFG GMR

Weekly Calendar

Source: Bloomberg & MUFG GMR

Key Events:

• Market participants will continue to closely monitor developments in the Middle East in the week ahead. Investor optimism over a deal between the US and Iran to end the conflict sooner has faded over the past week. The main focus is likely to be on whether there is any progress in negotiations between Iran and the US. Without an agreement, there is still a high risk that the conflict will escalate further as highlighted by reports that the US is considering one massive “final blow” which could involve boots on the ground. The longer the Strait of Hormuz remains effectively closed the more evidence of supply constraints will emerge globally.           
• The main economic data release in the week ahead will be the release of the latest nonfarm payrolls report for March. Employment growth has been volatile at the start of this year but the underlying trend remains weak. Private employment growth has averaged only around 30k/month over the last three to six months. The energy price shock triggered by the Middle East conflict could make businesses even more uncertain over the economic outlook, and dampen hiring intentions. Further evidence of weak US labour market conditions would reinforce expectations that the Fed will be reluctant to raise rates in response to the near-term inflation risks. Key Fed speakers in the week ahead include New York Fed President Williams and St. Louis Fed President Musalem who could further insight into the potential impact for Fed policy from the Middle East conflict.         
• The release of minutes from the BoJ’s latest policy meeting will attract market attention and potentially shed further light on whether the BoJ plans to raise rates as soon as at the next policy meeting at the end of April. Higher energy prices and the weaker JPY are both increasing upside risk to near-term inflation putting pressure eon the BoJ to tighten policy. It has even been speculated that Japan is considering intervening in the crude oil market. A strategy that is unlikely to sustainably lower oil prices while supply constraints remains in place in the Middle East.