The DXY Index depreciated by 0.4% to 99 overnight following a three-week rally. The greenback depreciated despite US President Donald Trump’s renewed tariff threats on the EU over Greenland, as focus remains on the risk of an adverse Supreme Court ruling against the tariffs imposed under the International Emergency Economic Powers Act (IEEPA). Markets interpreted the rise in the US Treasury 10Y yield above 4.20% as an unfavourable ruling, opening the prospect of duty refunds that would widen the fiscal deficit, blunting the USD’s tariff-haven status.  Meanwhile, Fed Chair Jerome Powell’s presence at the Court’s hearing of Governor Lisa Cook also sharpened the market’s focus on the institutional risks posed by Trump’s policies. 

Japanese Prime Minister Sanae Takaichi called for a snap election on February 8, seeking to capitalize on her high personal approval ratings for a stronger mandate. The Bank of Japan is widely expected to keep the policy rate unchanged at 0.75% on January 23, the same day the Lower House of Representatives dissolves, and the National CPI inflation ex fresh food is expected to slow to 2.4% YoY in December from 3% in November. However, the BOJ has signalled that it would upgrade its GDP growth forecast for fiscal years 2025 and 2026 and may announce a tighter neutral interest rate, currently estimated at 1.00-250%. Markets will likely read USD/JPY’s 160 level symbolically in the wake of the election outcome. A level capped at 160 assumes that voters view the fiscal stimulus as Takaichi completing Abenomics by shifting the economy from ending deflation towards achieving sustainable growth dynamics. Conversely, a level above 160 would affirm the united opposition’s bet that voters care more about cost-of-living issues and a clean government, the two main issues that cost the LDP coalition its majority in 2024. 

Quote of the Day
“Great minds discuss ideas; average minds discuss events; small minds discuss people.”
     Eleanor Roosevelt

January 20 in history
Franklin D. Roosevelt became the first and last US President to serve four terms in 1945.