Fundamentals Support the Japanese Yen

CURRENCY FUTURES

The U.S. dollar index declined for a sixth consecutive session in light of increasing concerns over the escalating trade war.

German exports declined 2.5% in January compared with the previous month, which compares to predictions of a 0.5% increase. Imports increased 1.2% in January compared with the previous month.

Industrial production in Germany increased 2.0% month-over-month in January 2025, beating market expectations of a 1.5% increase.

The Japanese yen advanced to the highest level since October 21, 2024 as demand for safe-haven assets increased in light of growing concerns over tariff risks.

Japan’s 10-year government bond yield increased to almost 1.6%, marking its highest level in more than 16 years. This surge came as investors grew confident that the Bank of Japan will continue raising interest rates. Last week, BOJ Deputy Governor Shinichi Uchida hinted that further interest rate hikes could be on the horizon if economic forecasts align with predictions.

Some analysts are expecting the BOJ could increase its key interest rate at its July policy meeting.

STOCK INDEX FUTURES

Stock index futures are lower as current geopolitical and economic concerns are exerting downward pressure on stock index futures.

In the longer term, a more accommodative Federal Open Market Committee will support futures.

INTEREST RATE MARKET FUTURES

Futures are higher across the board on the belief that the Federal Open Market Committee will more aggressively move to accommodation this year.

There are no Federal Reserve speakers this week since the pre-FOMC ‘blackout’ period just started. The blackout period begins on the second Saturday before a Federal Open Market Committee meeting and ends on the Thursday following the meeting. The next FOMC policy meeting is scheduled for March 19.

There has been a major change in the fundamentals and outlook for Federal Reserve policies. The probabilities are increasing that the central bank will more aggressively ease credit conditions this year.

Financial futures markets are predicting the FOMC will keep its fed funds rate unchanged at its March and May meetings but will lower its key rate three more times this year with the first reduction at its June policy meeting.

In light of increasing probabilities of the FOMC more aggressively moving to accommodation this year, additional price gains for futures across the yield curve are likely.

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