Trump’s administration has confirmed that no tariffs will be imposed on Day One. Instead, he intends to issue a memo to review trade relationships with China, Mexico, Canada, and other countries. As a result, with no immediate policy shocks from Trump, market expectations for a BoJ rate hike this week have risen to over 90%.

CHF: Same story

The CHF remains under pressure due to persistently low inflation and expectations of further monetary easing by the SNB. December’s inflation data highlighted intensifying disinflationary trends, with headline CPI at 0.6% y/y and core CPI at 0.7% y/y, both below forecasts. These figures have strengthened market expectations for a 25bps rate cut in March, with the possibility of additional cuts later in the year. The SNB’s dovish stance, coupled with the franc's status as a funding currency following the December 50bps rate cut, adds to the bearish sentiment.

However, global risk sentiment remains a key consideration, as geopolitical or financial market risks, such as those stemming from Trump’s inauguration, could trigger risk-off flows. Despite this, the JPY appears to be the preferred safe-haven currency over the CHF in the current environment. With a light CHF calendar ahead, the franc is likely to remain under pressure, driven by subdued inflation, the SNB’s accommodative policy, and its clear preference for avoiding a strong franc.

JPY: Rate hike this week

The yen is emerging as a key focus in global markets, supported by evolving expectations around the BoJ’s monetary policy stance. Recent comments from BoJ officials have amplified speculation of an imminent rate hike, bolstered by positive economic indicators and inflation forecasts. BoJ Governor Ueda and Deputy Governor Himino have signaled that further rate adjustments will depend on economic progress and wage growth, with recent data pointing toward solid wage increases. Bloomberg reports indicate that several BoJ officials are confident in Japan’s inflation and economic trajectory, aligning with the BoJ’s stable 2% inflation target. As a result, the probability of a 25bp hike at next week’s meeting has surged to 90%, with the Japanese rate market reflecting expectations of further hikes by year-end.

Additional support for the yen comes from indications that Japanese firms are embracing wage hikes as a given, alongside potential upward revisions to the BoJ’s inflation forecasts. Furthermore, analysts suggest that BoJ actions, combined with reduced tolerance for yen weakness, could counter upward pressure on USD/JPY, particularly as FX carry trades lose appeal amidst heightened market volatility.

Looking ahead, markets remain watchful of external risks, especially those associated with Trump’s inauguration and potential disruptive policies. Should U.S. economic or financial market conditions deteriorate, it may impact the BoJ’s decision-making. However, assuming stability, the anticipated rate hike and Japan’s improving fundamentals provide a constructive outlook for the yen. As expectations build, the yen’s recent strengthening trend is likely to persist, supported by growing confidence in a more hawkish BoJ policy stance.

Current market context

During Trump's inauguration on January 20 (US time), his administration confirmed that he would not impose any tariffs on Day One. Instead, he plans to issue a memo to review trade relationships with China, Mexico, Canada, and other countries. Additionally, in the early Asian session today, President Trump signed a large number of executive orders, none of which were related to tariffs. This further reinforces the idea that he intends to conduct a thorough review before taking any action. The news provided some relief to financial markets and strengthened expectations that the Bank of Japan (BoJ) could proceed with a rate hike this week, as there were no immediate shocks from Trump. However, risks remain, as he could change his mind at any time.