US/JAPAN
USD dropped to a four-month low, Treasury yields are slightly lower across the curve, and S&P500 futures are down a little. The suspected JPY intervention-fueled rally that began on Friday extended into today’s session, with USD/JPY plunging to a two-month low near 153.40. The sharp drop in USD/JPY is spilling over into broader USD weakness against most major currencies.
Japan and US officials won’t confirm if they intervened jointly to strengthen JPY, but the move bears the hallmark of official intervention. Both Japanese Finance Minister Satsuki Katayama and Atsushi Mimura, the finance ministry’s top FX official, warned today that authorities will respond to FX moves appropriately in close coordination with their US counterparts regarding currency markets as needed.
We expect the dollar index (DXY) to hold above its July and September 2025 lows as the Fed shows no urgency to resume easing. However, structural drags on USD alongside the risk of additional intervention to bolster JPY could outweigh the more neutral cyclical USD backdrop and pull USD lower, like in Q2 last year.
Second-tier US economic data is due today: November Chicago Fed national activity index, November durable goods orders, and Dallas Fed manufacturing activity index.
EUROZONE
EUR/USD jumped to 1.1898, a whisker below its September 17, 2025 high at 1.1919, before retreating to 1.1850. Germany’s IFO business expectations index unexpectedly dipped in January (actual: 89.5, consensus: 90.3, prior: 89.7) but remains indicative of an ongoing recovery in Eurozone economic activity.
Bottom line: the ECB is in a good place to keep rates on hold for some time. The swaps curve price-in steady rates at 2.00% over the next twelve months and that’s unlikely to change much in the near term. As such, EUR/USD overshoot looks fragile, and we expect EUR/USD to settle closer to 1.1600 in the near-term.
CHINA
China continues to make progress in building the infrastructure necessary to increase the international usage of the yuan. PBOC Deputy Governor Zou Lan said today the PBOC would support the Hong Kong Monetary Authority's (HKMA) decision to double liquidity for Hong Kong’s yuan market, expand the supply of offshore yuan government bonds, improve mechanisms for offshore yuan market operations, and explore possible launch of offshore China bond treasury futures.
The yuan remains lightyears away from catching up to the dollar’s global dominance as a unit of account, medium of exchange and store of value. The dollar accounts for nearly 57% of official foreign exchange reserves vs. 1.9% for the yuan, 89% of total daily FX turnover vs. 8.6% for the yuan, and 50.5% of SWIFT global payments vs. 2.7% for the yuan.
Nevertheless, there is scope for incremental increases in yuan usage globally which is a structural tailwind for the currency. The international usage of the RMB currency remains very low compared to China’s shares of world GDP and world trade.
