Two factors support the DXY Index around the 108 level. First, US President Donald Trump has set February 1 as the day to impose tariffs on Canada, Mexico, and China. Trump also instructed the commerce secretary to examine the US trade deficit and evaluate the feasibility of a universal tariff. The Senate is expected to confirm Howard Lutnick, Trump’s nominee for Commerce Secretary. Second, the futures and OIS markets see the Fed delaying its next rate cut to June and many central banks delivering multiple cuts before that. At next week’s FOMC meeting, the Fed could affirm a longer journey towards achieving the 2% inflation target due to Trump’s incoming policies on tariffs and immigration. Conversely, the European Central Bank will likely view tariffs as a greater risk to growth than inflation when it lowers rates next week. This divergence in how the Fed and the ECB interpret Trump’s tariffs reflects the contrasting dynamics between the resilient US economy and the stagnant Eurozone economy.
USD/JPY is trading near the top of the 155-156.5 range established since mid-January. The OIS market has priced in a 96% chance of a 25 bps hike to 0.50% at tomorrow’s Bank of Japan meeting. BOJ is also likely to raise its inflation forecast. Base wages grew by 2.7% YoY in November, nearing the 3% threshold necessary to sustain 2% inflation. Tomorrow’s national ex-fresh food inflation is expected to increase to 3% YoY in December from 2.7% the previous month. In the end, the US’s inflation and interest rate outlook will probably matter to USD/JPY than Japan’s. On a positive note, the BOJ’s hike expectation did prevent USD/JPY from revisiting last year’s highs above 160 despite the US 10Y bond yield briefly pushing above April 2024’s peak.
We expect the Monetary Authority of Singapore to maintain the status quo at tomorrow’s policy review. We do not interpret the NEER’s decline from the top to the mid-point of the policy band as an imminent signal to tweak any of the band’s three parameters – the slope, mid-point, and width. Instead, we consider this repositioning consistent with the recent decline in the MAS core inflation into this year’s 1.5-2.5% forecast range and a lower official growth outlook of 1-3% in 2025. There is no urgency to act now. The IMF’s latest outlook is calling for stable global growth this year amid a warning about inflation risks from Trump’s policies. The upcoming Budget announcement on February 18 will address the cost of living issue, which has become a primary concern for Singaporeans ahead of this year’s general elections. Barring any surprise rise in the USD, with the NEER near the band’s centre, USD/SGD’s upside will likely be limited to 1.3570, according to our model.
Quote of the Day
“What you do today can improve all your tomorrows.”
Ralph Marston
January 23 in history
The Wham-O toy company rolled out the first Frisbees in 1957. 
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