Buy NOK, SEK, AUD, JPY. Sell EUR, GBP, USD?

The US and Japanese authorities intervened in the USD/JPY market on Friday evening, triggering heightened volatility. This resulted in a sharp appreciation of the JPY and KRW, alongside another surge in gold prices, now exceeding $5,000. According to CFTC data, the market had recently shifted from a long yen position to short, but this morning’s movements likely erased those short positions. So, what’s next?

The US government, under President Trump and Treasury Secretary Scott Bessent, has been vocal about its preference for a weaker US dollar. While purchasing power parity (PPP) for USD/JPY is below 100, PPP is notoriously unreliable for forecasting but could still irritate US policymakers. From the US perspective, North Asian currencies exhibit significant undervaluation and sustain substantial trade surpluses with the US. However, Japan faces its own challenges, including mounting government debt and stagnant economic growth. A stable yen, rather than a major rally, would be far more desirable for Japan—and the same goes for South Korea. While the current volatility is intense and ongoing, we don’t foresee a sustained downtrend in USD/JPY, as it could have severe economic repercussions.

This development coincided with BlackRock’s Rick Rieder emerging as the leading candidate for the next Federal Reserve Chair, according to betting markets. Rieder is considered supportive of easier Fed policies, which aligns with the broader push for a weaker dollar. We will closely watch the upcoming FOMC meeting, but the strength of the US economy will largely determine the dollar's trajectory. Despite the administration’s preference for lower rates and a weaker dollar, factors like a resilient economy, robust equity markets, and 2.6% core CPI inflation pose significant hurdles. By mid-February, we should have a clearer sense of direction.

Currently, we remain bearish on EUR/JPY and GBP/AUD. A slight downside miss in Germany’s IFO index doesn’t change much, as we only anticipate 1% GDP growth for the eurozone this year—insufficient to justify further EUR gains. Similarly, the UK’s projected sub-1% growth contrasts sharply with Australia’s forecast of above 2%, which brings to mind the recent Ashes cricket series. We also maintain a positive outlook on NOK and SEK, which are likely to benefit from continued dovish rhetoric from the US.