Dramatic Victory for Takaichi, Beijing Cautions on US Treasuries, and Starmer's Woes Persist snbchf.com

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Marc Chandler
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Dramatic Victory for Takaichi, Beijing Cautions on US Treasuries, and Starmer's Woes Persist

There are three important developments. First, Japan’s Prime Minister Takaichi led the LDP to a landslide victory that secured a 2/3 “super majority” that is understood as a powerful mandate and provides an opportunity to change the constitution. While JGBs were sold and Japanese equities bought, after some initial volatility, as many anticipated, the yen has defied expectations and strengthened. Second, Chinese officials have recently moved to discourage financial institutions from buying more Treasuries. Apparently, it was justified on risk-management grounds rather than geopolitics. And it may be begun in recent weeks rather than the past couple of days. Third, UK Prime Minister Starmer’s chief of staff resigned over the Mandelson appointment, but it is not clear that it has taken off the pressure from Starmer.

The US dollar is lower against all the G10 currencies, led by the Australian and New Zealand dollars, though the Australia reported disappointing household spending figures. While the daily momentum indicators seem to have favored the greenback, the price action before the weekend called it into question. The reaction of American investors to the move by Beijing may set the tone ahead of the heavy schedule of economic reports due in the coming days.

Prices

G10

• Ahead of the weekend, the euro traded on both sides of the previous day’s range but settled below its high. The $1.1765 area tested before the weekend was a retracement target of the rally from the second half of last month. It frayed $1.1825 ahead of the weekend. Follow-through buying today lifted it to $1.1870. The initial retracement target of the decline since the January 27 high (~$1.2080) is near $1.1885, and the next is around $1.1925.

• The dollar consolidated ahead of Sunday’s election near its best level against the yen since the Fed’s “rate check” on January 23. It held above JPY156.50 ahead of the weekend and did not stray much beyond 20-ticks from JPY157.00 in the North American session. The landslide victory for Takaichi’s LDP weighed on the yen almost immediately, but it recovered fully. It has traded in a wide range that encapsulates the price action of the previous two sessions: ~JPY156.20-JPY157.75. A close below last Friday’s low would have negative implications for the greenback.

• Sterling initially extended its post-BOE losses to about $1.3510 before the weekend before it recovered to around $1.3625. It settled firmly. Nearby resistance is seen in the $1.3650-65 area. It is trading in a range of about $1.3585-$1.3640 today. A key question to start the week is whether the resignation of the chief of staff to the prime minister is sufficient to relieve Starmer of the pressure he has come under, or whether it will lead to relieving Starmer of his job. There is talk that other cabinet ministers may threaten to resign. And then there is the special election later this month and the local elections in the Spring.

• The US dollar recorded a bearish outside down day against the Canadian dollar by trading on both sides of the previous session’s range and closing below its low. In the pre-weekend setback, the US dollar fell to about CAD1.3625, which met a retracement (38.2%) target of this month’s gains. There has been no follow-through selling so far today, and the greenback is consolidating between about CAD1.3635 and CAD1.3685. The next retracement is near CAD1.36 and the next is around CAD1.3575.

• The Australian dollar posted a bullish outside up day against the greenback ahead of the weekend. It initially was pushed below $0.6900 for the first time since January 26. It then proceeded to recover slightly to $0.7025. It reached $0.7045 today before stalling. Last week’s high, after the central bank hike was $0.7050, while the high from late January was a little shy of $0.7100.

• The dollar recorded a bearish outside down day against the Mexican peso ahead of the weekend. After poking briefly above MXN17.5650, the dollar reversed and fell to nearly MXN17.2450 in the North American afternoon. The greenback edged lower to about MXN17.2265 today but is now virtually flat in late European morning turnover. Last week’s low was near MXN17.1935, and last month’s low is reported near MXN17.1050, which it had not seen since June 2024.

• After setting the dollar’s reference rate higher in the last two sessions, the PBOC took it lower today. The fix was set at CNY6.9523, a new low for the campaign. The dollar has been sold to a new low against the offshore yuan, as well, falling below CNH6.92. Reports indicate that Chinese regulators have told financial institutions to reduce their holding of US Treasuries. The argument was based diversification rather than geopolitics or US policies. Apparently, officials have been doing this formally and informally in recent weeks. Chinese data seemed to show that as of the end of Q3, Chinese banks held almost $300 bln of dollar bonds.

• The dollar traded firmer against the Indian rupee but held below the pre-weekend high near INR90.8550. It is near the session high (~INR90.77) in late turnover.

Other Markets

• Asia Pacific equities rallied. The Nikkei was up over 5% at one point before settling almost 4% higher. South Korea’s Kospi, however, led the region with a 4.1% gain, and after the ruling party won in Thailand, the equity market jumped almost 3.5%. Europe’s Stoxx 600 is nursing a small gain, while US index futures are sporting modest losses with the Nasdaq down about 0.5% and the S&P 500 off around 0.3%.

• Bonds have been sold. Following the stunning electoral victory in Japan, the 10-year yield rose almost six basis points to 2.27%. Benchmark 10-year yields are mostly 1-2 bp higher in Europe, but the UK Gilt yield is up nearly five basis points, apparently on heightened political anxiety. The 10-year US Treasury yield is up almost three basis points to a little above 4.23%.

• Gold advanced to nearly $5050 before steadying. It is straddling the $5000 level in late European morning turnover. Silber reached almost $82.50 but is back below $80 now.

• March WTI is trading inside the pre-weekend range and is little changed now around $63.75.

Data

• The Federal Reserve’s January inflation survey is unlikely to capture the market’s imagination today. It is overshadowed by this week’s more important data, including non-farm payrolls, retail sales, and CPI. The Fed funds futures are discounting more than a 90% chance of a Fed cut at the end of H1. It could be Warsh’s first meeting as Chair, if the confirmation process evolves it usually does. However, the rub now is that the investigation of the Fed’s renovation has spurred some Republicans to join the Democratic Senators in threatening to block the process while the investigation continues.

• Mexico reports January CPI today. Prices pressures likely increased. The headline pace may have ticked up to 3.8% from about 3.7%. The target range for the headline and core is 2-4%. The core rate has been above 4% since last May. The median forecast in Bloomberg’s survey sees it rise to around 4.5% from slightly above 4.3% in December. If accurate, it would be the highest since March 2024. Banxico confirmed last week that it will pause its easing cycle but anticipates being able to cut rates again later this year.

• Before the weekend, Japan reported that December household spending fell 0.3% year-over-year. Yet today it reported that cash earnings for 2.4% year-over-year in December, as little less than expected. Part of the challenge is that real wage growth remains weak. It was -0.1% compared to a year ago. Japan’s December current account was also reported. There is a strong seasonal bias toward deterioration, and it did not disappoint. The surplus fell to JPY729 bln from JPY3.67 tln in November. The trade surplus, on a balance of payments basis, also narrowed (JPY135 bln from JPY625 bln).

• Australian household spending unexpectedly fell by 0.4% in December, after rising by an average of 1.2% in the previous two months. The strength of consumption was a consideration behind last week’s Reserve Bank of Australia rate hike. The futures market is pricing in an 85% chance of another hike at the May meeting. It is difficult to see the pendulum swing much further.

• Over the weekend, China reported that the dollar value of its reserves rose $41.2 bln to $3.399 trillion. In dollar terms, it was the largest rise since the end of 2023. In percentage terms, the 1.23% rise was the most since last April’s 1.27% increase. In a report, last week, the US Treasury said that given the large external surpluses and undervalued currency, officials should allow the yuan to appreciate. Still, to many, this is consistent with the administration seeking a weaker dollar. To say the same, in a different way, given the large US external deficit and the overvalued dollar, the US should allow the dollar to depreciate. Meanwhile, China reported its gold holdings rose by about 40k troy ounces to 74.19 mln ounces. At about $4300 an ounce, China’s gold reserves are worth about $319.45 bln.

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About Marc Chandler

He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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