FX Weekly Strategy: Asia, February 9th-13th

The Lower House election will be held on Feb 8/9th. Latest polls seem to suggest the LDP will retake their majority in the Lower House, thanks to the latest rounds of economic stimulus. The boldest forecast is seeing the LDP and coalition to gain more than 300 seats in the 469 seats Lower House. However, the landslide win maynot be beneficial for the JPY. Market participants have long fear fiscal irresponsiblity will push the indebted Japan towards the point of no return and a sole majority LDP may be easier for Takaichi to push out her policy. It looks inevitable for the BoJ to hold the line if speculative interest resurge.

On the chart, the pair is settling back from test of strong resistance at the 157.00/157.42 area as prices consolidate strong gains from the 152.10 low. Intraday studies are unwinding overbought readings but bullish momentum keeps pressure on the upside. Break above the 157.42 resistance, if seen, will see scope for extension to strong resistance at 157.90/158.00 area. Meanwhile, support is raised to the 156.00/155.60 area which should underpin. Would take break here to fade the upside pressure and open up room to 154.40/154.00 support and lower.

We expect a 0.2% increase in January’s CPI, with a 0.3% rise ex food and energy, though risks are to the upside with our forecasts before rounding being for gains of 0.24% overall and 0.34% ex food and energy. The latter would be the strongest since August. Pricing decisions are often made at the start of the year and January data in recent years has tended to be quite strong, with ex food and energy gains of 0.4% in January of 2025, 2024 and 2023 and 0.6% in 2022, though only the January 2025 gain was clearly above the trend seen at the time.

Reasons to expect a bounce this year include the January 14 Fed Beige Book stating that several contacts that initially absorbed tariff increases were starting to pass them on, and also that Q4 CPI data slowed more than did most other inflationary indicators, suggesting scope for a correction. However gasoline prices look weaker and we expect food to moderate after a strong 0.7% increase in December. December core CPI rose by only 0.24% before rounding despite strong gains in two of the most volatile components of services, air fares and lodging away from home, the latter part of housing which is expected to gradually lose momentum. Against this, autos, one of the more volatile components of goods, have scope to correct from a weak September. Upside risks appear more pronounced in goods, particularly if there is some tariff feed-though. We expect a 0.5% increase in commodities less food and energy but only a 0.3% rise in services less energy. We expect supercore CPI, excluding food, energy and housing, to rise by 0.3% in January, with housing converging towards the core.

We expect January’s non-farm payroll to rise by 85k overall and by 80k in the private sector, which would be on the firm side of trend and could be even more so after what could be substantial negative historical revisions. However, we expect unemployment to rise to 4.5% from 4.4%. We expect average hourly earnings to rise by 0.3%, in line with recent trend. Initial claims remained low in January’s payroll survey week, suggesting layoffs remain limited too. While signals on hiring are also weak January is a month in which before seasonal adjustment payrolls fall sharply, meaning that a low level of layoffs could be more significant than a low level of hirings in seasonally adjusted data. ADP reported a slower 22k rise in private payrolls, but we expected ADP data to underperform. 

A sector to watch this month is retail. We have seen three straight declines of near 20k in this sector, despite retail sales holding up well. Limited seasonal hiring before Christmas may mean fewer layoffs than the seasonals assume in January. We expect private services to rise by 70k in January, the strongest since September, the last month in which retail employment increased. An improvement from a 58k increase in December private services will be more than fully explained by the swing in retail. We expect a modest 10k rise in goods employment after a 21k decline in December and this would be a fourth straight month in which goods change direction, construction leading the volatility. Bad weather in late January came too late to be captured in January’s payroll. We expect a marginal 5k rise in government, fully in state and local. Federal is however stabilizing after a sharp drop in October as DOGE payoffs came through.

Figure: GDP Growth Volatile but Hardly Strong?

Even given the surprisingly solid November GDP release, this merely returns the level of GDP to where it was in June, albeit briefly as for the latter.  Partly undermined by wet and warm weather through the month, we see no change on the December figure, in m/m terms (Figure), thus no reversal of the 0.3% November that following an unrevised fall of 0.1% in October 2025 and a growth of 0.1% in September 2025 (revised up from our initial estimate of a fall of 0.1%).  This means that Q4 is set for a 0.2% q/q rise which would result in 2025 growth of 1.4%.   But we see no more than 0.8% this year; this actually and merely being an extension of the anticipated Q4 result.  Regardless, we remain wary about the GDP numbers.  Although there have been some better business survey numbers, other such insights provide still sobering reading (Figure 2) as do non-official employment indicators, the latter actually suggesting a worsening backdrop of late. 

It is unclear how uncertainty (especially related to budget worries) affected activity in October and whether a degree of more fiscal clarity even ahead of the actual Budget may have helped sentiment in November.  But businesses across the production, construction and services sectors reported that they, or their customers, were waiting for the outcome of the Autumn Budget 2025 announcement on 26 November 2025. These comments came from a range of industries, but were mainly from manufacturers, construction companies, wholesalers, computer programmers, real estate firms, and employment agencies. 

For the week ahead

UK

Released alongside monthly production and visible trade data come December and Q4 GDP figures (Thu). Partly undermined by wet and warm weather through the month, we see no change on the December figure, in m/m terms, thus no reversal of the seemingly upbeat 0.3% November that following an unrevised fall of 0.1% in October 2025 and a growth of 0.1% in September 2025 (revised up from our initial estimate of a fall of 0.1%).  This means that Q4 is set for a 0.2% q/q rise which would result in 2025 growth of 1.4%.  

But the week starts with survey data suggesting more weak labor market signs with the REC figures (Mon).  Monday also sees what may now be floating MPC voter Mann speak with arch hawk Pill due to address on Friday.

Eurozone

There is little of note data wise with revised Q4 GDP data and trade numbers due Friday.  There is an array of ECB speakers ranging from Chief Economist Lane (Mon) to hawk Schnabel (Wed).

Rest of Western Europe

Sweden sees monthly production and orders figures (Tue) and the details of (soft) January CPI numbers (Fri).  Norway sees Q4 GDP data on Monday but with more significant (for markets) CPI figures (Tue) which may see the CPI-ATE rate down to 2.9% compare to December surprise 3.1% outcome, albeit uncertainty added to by annual reweighting and reclassification of the indices.

USA

The US sees several significant data releases. Monday is however quiet though Fed’s Bostic will speak. On Tuesday we expect December retail sales to maintain momentum, with a 0.6% rise overall with 0.5% increases ex autos and ex autos and gasoline. Also due on Tuesday are Q4’s Employment Cost Index, where we expect a 0.9% increase, January’s NFIB small business optimism index, and  December import prices. Fed’s Hammack and Logan will also speak.

Wednesday will see the delayed January non-farm payroll. Here we expect an above trend rise of 85k with 80k in the private sector but with an increase in unemployment to 4.5% from 4.4%. We also expect an on trend 0.3% increase in average hourly earnings. January’s budget statement is also due. Thursday sees weekly initial claims, and January existing home sales, where we expect a correction from recent strength with a 5.3% decline to 4.12m.

Friday sees January CPI, delayed from Wednesday. We expect gains of 0.2% overall and 0.3% ex food and energy, with both on the firm side before rounding. Fed’s Miran is scheduled to speak.

CANADA

The Bank of Canada will release the summary of deliberations from its January 28 meeting on Wednesday. December building permits are also due on Wednesday in a quiet week for data.

JP

Labor Cash earning on Monday will be the most important release. The November earning has missed estimate by a bunch and see real wage dip deep into negative. The BoJ would definitely want to see stronger wage growth to justify their continues hiking of rates. If not, the pace will likely be further delayed. More importantly, is the election result on the same day. LDP is expected to win back the majority of the lower house, even getting more than 300 seats for the coalition. However, we will need clarity as sentiment change fast and we could not foretell what market participants read into. For now, market participants seem to be tilted towards LDP win would lead to more fiscal irresponsibility and send JPY lower. We believe the future speech from Takaichi will be critical after the election.

AU

Consumer inflation expectation on Wednesday, business confidence on Tuesday are mostly tier two data.

NZ

Only Business PMI on Friday.

Recap of the week

Market Correction or Profit-Taking?

More Hikes to Come From the RBA

ECB Papering Over the Cracks

EZ HICP Services Inflation Less Resilient as Core Hits Cycle-Low

BOE March Cut and Then More

Figure: Gold Prices and Inverted DXY ($ and Index)

For now we see some further profit-taking on risky positions in gold/silver/copper/equities and short USD positions.  However, a bigger macro catalyst is required to produce a deep correction in equities and major risk off.  The nomination of Kevin Warsh for Fed chair is unlikely to be the catalyst, as his previous hawkishness is not representative and a major change in Fed decisions remains unlikely.  The U.S. economy/AI revenue growth and Trump erratic decision making are all catalysts for a deeper correction, but none at the moment is producing the news flow to immediate turn a pullback into say a 5-10% U.S. equity market correction.  Iran/reciprocal tariffs and U.S. labor market will be watched in the coming weeks. 

After a great performance last year, interest intensified for gold, silver and copper in January but has gone into significant reverse in the past few sessions.  Some have pointed to Kevin Warsh appointment as Fed chair as a catalyst.  While this could be partially true for gold/silver, the DXY and U.S. Treasury market has not seen the magnitude of movements elsewhere.  The DXY has bounced, but it’s recent correlation with Gold has been weak (Figure).  Meanwhile, 10yr U.S. Breakeven inflation expectations have hardly moved (Figure 2).  As we shared in our thoughts on Kevin Warsh (here), he will likely be more dovish than his previous role as Fed governor but restrained by the majority of voting FOMC members remained focused on their views on economy/inflation/Fed Funds and neutral rates. This is why the reaction to Warsh nomination as Fed chair has been muted in the U.S. Treasury market.  The gold and silver sharp pullback reflects speculative longs taking profits and then liquidating as stops got hit.  Copper longs have built up on anticipation that Trump could impose 15% tariffs on Copper imports (Commodity Outlook here) and have also been hit by profit-taking and now stops.  This selloff in metals could carry on for a couple of days and dent sentiment multi week/month, but what about equities?   

The RBA has increased the cash rate to 3.85% in the February meeting as Inflation continues to run hot. The inflationary picture has turned hot after the Q3, partially from previous year's energy rebate base effect but also suggest stronger underlying inflation. The rate hike is mostly priced in and thus the forward guidance in cash rate assumption is the real hawkish surprise.

In the latest cash rate assumption, the RBA is seeing two more hike to 4.2% by year end 2026. It came as a hawkish surprise with most market participants expecting only one more hike this year. Their CPI forecast has also been revised higher, with headline shooting to 4.2% in mid 2026 before retreating back with target range in mid 2027. Trimmed mean CPI is also revised 0.5% higher throughout 2026. Moreover, the RBA is visualizing a stronger labor market and more economic growth for Australia in 2026.

While the forward guidance "The Board is focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome."  is quite a similar rhetoric, the forecast in private demand seems to be driving RBA to the hawkish end of the road. We believe their forecast on inflation is too aggressive and could only see more more rate hike in 2026.

Figure: EZ HICP Including Projections (%)   

As widely expected the ECB kept the policy rate unchanged at the February meeting.  The broad message remains that the ECB Council is comfortable with current policy rates, which provides short-term forward guidance of no change in rates.  This message came from the ECB statement and also Lagarde’s press conference. However, the December minutes show a split between the doves and hawks multi quarter and we agree with the doves’ concerns.  We remain of the view that financial conditions and lending rates are worse than the current ECB depo rate level suggest and means that 2026 EZ growth does not really pick-up.  Combined with a mild undershoot in inflation, this can build the case for the ECB to deliver two 25bps cuts in June and September 2026.

 ECB Lagarde emphasized what the majority of the council could agree on, which is that policy rates are currently appropriate and expect no change in policy rates in the near-term amid a broadly balanced risk assessment.  However, Lagarde is talking mainly about the near-term and the December ECB minutes show a clear division between doves and hawks multi quarter.  The doves are concerned about the economic recovery, but also that slowing wage inflation could mean an undershoot of inflation. Either could mean further rate cuts are needed. The hawks take a more upbeat view of the GDP trajectory, but are also concerned that recent wage compensation data means that inflation could now be slow to fall.  For the hawks this could mean that tightening is required into 2027.  The ECB moved away from risk assessment on each to a broad list, with Lagarde admitting that views diverged on the ECB council.

Figure: Headline and Services Down Clearly

Having been range bound for some 5-6 months between 2.0% and 2.2% until November but after a fall to 1.9% in December headline HICP inflation dropped to 1.7% in the flash January data, thereby matching expectations and the short-lived Sep 24 outcome.  The drop came in spite of higher food inflation, instead being pared back by energy, where base effects were at work, but with services down 0.2 ppt to match the September low of 3.2%. In turn, this allowed the core rate to fall a notch to 2.2%, the lowest in over five years and hinting at a clear undershoot of the ECB’s Q1 2026 projection.   

We see this as the continuation of what may be a short-lived fall toward 1.5% for the headline rate in the current quarter, but where the core rate easing may prove more durable.  To what extent the fall in this latest data at least partly reflects a softness in non-energy industrial goods (NEIG) inflation. The latter may possibly reflect an increasing sign of softer import prices possibly related to Chinese export dumping and/or the stronger euro, either being an issue for the ECB.

As of these latest numbers, several methodological changes take effect in the HICP. Over and beyond the usual annual reweighting of the components, the index will also now be compiled according to the new classification. Games of chance will be included in the HICP under the division of recreation, sport and culture. The index reference period will also be updated to 2025=100.  What is clear is that with (relatively resilience) services having seen an increase in its weighting in the last three years this has acted to push up recorded overall inflation but the reverse may now be occurring. To what extent this reweighting may be behind the fall in January services inflation is unclear at this juncture.  Regardless, it may just as much reflect weak demand paring back the ability of companies to raise prices, particularly those typically made at the start of each year!

 Figure: Marked Downgrade to Medium-Term Inflation Outlook

Six members of the MPC appear worried about the disinflationary impact from a weak economy and four of whom actually voted for a 25bps cut at the February meeting.  BOE Bailey and Mann, looking at the MPC minutes, are very close to voting for a rate cut, which suggests high confidence that a 25bps cut will be delivered at the March MPC meeting and this is our forecast rather than April. Indeed, we have long argued that the weak economy/tight financial conditions would build the case for three 25bps cuts in 2026 to 3.00% and Mann’s conversion away from a hawk to a centrist only increases our confidence, alongside economic data and wage inflation that suggests CPI will come down.  We pencil in these two extra cuts for the June or July and November and December (the timing of the Budget statement will impact the timing of a cut to 3.00%). 

The February MPC minutes are perhaps the most interesting with Andrew Bailey and Catherine Mann having greater confidence that the inflation persistence risk would be mitigated by the lower near-term path for inflation and placed greater emphasis on the risks to inflation from weaker activity. It only needs one of these members to vote for a cut in March and a 25bps cut will be delivered (given that four voted to cut 25bps today) and we are now confident that a 25bps cut will be delivered.  The BOE Monetary policy report forecasts have reduced Q1 2026 and 2027 GDP and Q1 2027 and Q1 2028 CPI inflation forecast (Figure 1) and Bailey noted in the press conference that most on the MPC agree with this changed picture, which also builds the case for BOE Bank rate cuts in March and beyond.