FX Daily: Japan's US Investment Program and Market Insights
In the current FX market landscape, two significant developments are capturing attention. Firstly, the Reserve Bank of New Zealand's (RBNZ) meeting has taken a more dovish stance than anticipated, with new governor Anna Breman expressing no rush to hike rates later in the year. This shift has caused a dip in the NZD/USD, challenging the notion that global economic optimism would lead to a hawkish re-pricing across procyclical currencies. Secondly, the US and Japan have unveiled the initial details of Japan's substantial $550 billion commitment to invest in the US. The first project involves a $33 billion investment in a natural gas production facility in Ohio, managed by a Softbank subsidiary. This marks a pivotal moment as direct Japanese investment in the US becomes a key focus this year, adding complexity to the USD/JPY dynamics.
The Japanese Ministry of Finance data reveals a resurgence in new Japanese direct overseas investment, reaching the pre-pandemic peak of approximately JPY20 trillion annually. The FX market's question for the year is whether this investment will bolster the dollar or resemble Japan's use of FX reserves to secure new USD loans, potentially easing yen pressure. Tokyo seems inclined towards the latter.
Despite the current absence of significant negative factors for the dollar, the market anticipates a robust 4Q25 US GDP release on Friday, suggesting that DXY could remain supported within the 97.50-98.00 range.
Chris Turner
EUR: Lagarde Speculation
Early European reports from the Financial Times suggest that Christine Lagarde might step down as President of the European Central Bank (ECB) before her term ends in October 2027. The rationale behind this speculation is the preference for confirming the next ECB president before the French presidential elections in April, allowing Emmanuel Macron to have a say. However, it's premature to anticipate an impact on the euro.
With Asia on holiday for the remainder of the week and a light data calendar today, EUR/USD is expected to fluctuate within the 1.1800-1.1850 range. The focus will also be on foreign central banks signing up for the ECB's expanded EUREP facility, a process that should unfold over the next three to four months.
Chris Turner
GBP: CPI Data Offers Relief
Following soft labor market data, the UK's January CPI data has provided some respite for sterling. ING's UK economist, James Smith, notes a mixed bag of inflation figures. While food inflation has decreased sharply, aligning with Bank of England forecasts, services inflation remains sticky. The BoE's core services metric, which Smith calculates, has increased slightly. This development doesn't significantly alter the near-term BoE outlook but slightly favors the hawks.
The real test will come in April if headline/services inflation aligns with expectations, potentially making the Bank more comfortable with the inflation outlook. EUR/GBP has seen a modest decline due to the news, but support is expected in the 0.8710/20 area. Later this week, flash eurozone February PMIs could boost the euro, and next week's UK by-election may exert political pressure on Prime Minister Keir Starmer's leadership.
Chris Turner
CEE: Stable Markets Ahead of Policy Signals
Yesterday's National Bank of Romania meeting, as anticipated, maintained rates at 6.50%. Today's governor's press conference will provide insights. The central bank's new forecast predicts a significant inflation decline in the third quarter, aligning with expectations. The market will closely observe whether the NBR prioritizes waiting for inflation to decrease or succumbs to a weak economy, potentially leading to a rate cut before July and August. The initial rate cut is still expected in May, with a total of 100bp this year.
In Hungary, despite the strong rate and FX moves on Monday, the market showed no signs of correction yesterday, stabilizing the market. This supports the view that the market won't reverse significantly, and the positive sentiment before the elections is expected to persist. The HUF market's future actions remain uncertain before the central bank meeting on Tuesday, where a restart of rate cuts is anticipated. However, the market is projected to remain bullish for the next few weeks.
Frantisek Taborsky
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