Key Highlights

• JPY continues to rally as officials again warn against currency volatility.
• Canada says it has “no intention” of pursuing a free trade deal with China.
• Gold prices top $5,000/oz for the first time; silver approaches $110/oz.

Chart of the Day

CHART OF THE DAY: FLOWS INTO JAPANESE CASH AND SHORT-DATED INSTRUMENTS

^{Source: BNY}

The market is on intervention watch for Japan. Despite the sharp moves since Friday, the latest BoJ accounts do not give any clear sign that there has been intervention over the past two sessions. Government rhetoric points to the need for stabilization, and we believe this view applies across asset markets, not just FX.

The issues with longer-dated Japanese government bonds (JGBs) are well-documented, but there are even signs of wobbles in general front-end liquidity preference, where JPY-denominated cash and short-term instruments (CAST) had been seeing good inflows due to attractive valuations and rising yields, albeit from a low level. Some of the purchases may have just been for liquidity management purposes, i.e., sales of underlying assets were not expatriated but converted into short-dated securities, signaling interest in maintaining some current or future exposure into Japanese assets.

Our data indicate that after seeing a quarter’s worth of consistent purchases from cross-border investors, the past two weeks have recorded the most significant phase of selling during this period. Total outflows are nowhere near enough to offset inflows, indicating that there is still a strong pool of front-end interest in place that is currently not exposed to JGB duration pressures. However, patience with the current direction of travel in exchange rates is not infinite, meaning that such liquidity pools are starting to risk manage a bit more.

What's Changed?

Investor temperament remains robust, as we see in iFlow Mood, which has set new highs for the year despite the noise of the last week. However, Monday’s price action so far suggests some waiting and mixed emotions. U.S. futures are down, as investors await a deluge of Q4 earnings releases: 20% of the S&P 500 will be reporting, including MSFT, META and TSLA on Wednesday. Interest rate decisions by the FOMC, BoC and key EM central banks will also be important; they leave rates waiting for guidance. President Trump’s threat of 100% tariffs on Canada over the risk of a Chinese trade deal is adding to the focus on geopolitics. The risks around FX intervention by Japan and South Korea extend the “waiting and talking” themes for the current trading session.

Japan and JPY: Talking about action is all that appears to have happened in FX, as BoJ accounts suggest no clear move. The role of the U.S. Treasury in supporting the Japan MoF matters more. The test for markets will be on that connection and logic. Actual USD sales, or the threat of them, could drive U.S. rates higher. 1.4% overnight gains for JPY to 153.40 extended Friday’s U.S. drift to 155.70. Talk about intervention, confirmation of a rate check action with the U.S. and polls showing approval ratings for Sanae Takaichi’s cabinet down 4.4 percentage points to 63.1% all are drivers. The Nikkei fell 1.9%, while JGBs saw further curve flattening: 2y rates rose 2.2bp to 1.25%, while 10y rates were down 1.8bp to 2.22%. This suggests intervention talk is not a long-term solution for the government.

South Korea and KRW: The biggest mover overnight was KRW: it rose 2%, testing 1433.60 to the USD. This is consistent with President Lee’s call that 1400 was his target to stabilize FX. The South Korean government sees investments by the National Pension Service (NPS) as a key tool to strengthen KRW, cutting the share of foreign investment. The Kospi fell 0.8% on the day, while 10y KTB yields dropped 5bp to 3.52%, suggesting money flows back to safety and the BoK’s role on rates will be key.

U.S. government shutdown risk: This weekend’s killing of another U.S. citizen in Minneapolis by ICE agents has dramatically shifted the odds of a partial government shutdown. The January 31 deadline for the Senate to vote could be blocked if the DHS funding bill is included. The weather has also made the timeline tricky, given flight disruptions from snow. Markets are not pricing in much of this risk, as U.S. 10y yields are back to testing 4.20%.

Bottom line: The ability to control FX, rates and inflation continues to test the central bankers and governments of the world, particularly Japan, South Korea and the U.S. The push and pull of politics and the funding of government debt remain the focus of the trading markets today, with U.S. 10y yields key. Alongside that, investors want a stable currency, as geopolitical pressures put new terms like “quiet quitting” of U.S. investments into play. Intervention (or talk of it) never works in markets without a larger framework to underpin growth and stable returns. Volatility, uncertainty and confusion over what the medium term will bring make today’s waiting all the more painful if the talking that follows is not constructive.

What You Need to Know

The Japanese yen rallied sharply overnight after warnings from Prime Minister Sanae Takaichi and Finance Minister Satsuki Katayama that reinforced the risk of official intervention against disorderly market moves. Takaichi said authorities would take all necessary measures to address speculative and highly abnormal movements, signaling heightened vigilance while maintaining that markets should determine prices. Katayama followed up by saying that Japan has a free hand to act, including intervention, and that she is monitoring currency developments with a strong sense of urgency. The remarks came amid close communication with their U.S. counterparts, reviving expectations of coordinated action along the lines of past episodes. The comments helped to reverse last week’s yen weakness, squeezed short positions and coincided with stabilization in Japanese government bonds after recent volatility. Nikkei -1.786% to 52885.25, USDJPY +1.058% to 154.07, 10y JGB -1.9bp to 2.238%.

The Trump administration is to take a 10% stake in USA Rare Earth as part of a $1.6bn debt-and-equity investment package investment package aimed at helping the company develop a domestic mine and magnet facility, two sources familiar with the deal told Reuters. This deal and a separate $1bn private investment will reportedly be unveiled on Monday, and Oklahoma-based USA Rare Earth will host a morning conference call with investors to discuss the terms. S&P Mini -0.014% to 6944.75, DXY -0.489% to 97.122, 10y UST -2.2bp to 4.203%.

Canada’s Prime Minister Mark Carney has said that Ottawa has no intention of pursuing a free trade agreement with China, pushing back against President Trump’s threats of punitive tariffs. Carney said recent engagement with Beijing was limited to resolving specific trade frictions, including over Chinese electric vehicles, agriculture and fish products. He also emphasized Canada’s obligations under the Canada-U.S.-Mexico Agreement. Trump warned he could impose 100% tariffs on Canadian goods if Canada “makes a deal with China,” later clarified by U.S. Treasury Secretary Scott Bessent as referring to a formal free trade pact or Chinese dumping. The comments followed a bilateral arrangement allowing limited Chinese EV imports in exchange for lower Chinese tariffs on Canadian canola. TSX 60 Future +0.413% to 1920.9, USDCAD -0.168% to 1.3676, 10y CGB +1.3bp to 3.413%.

The U.K. Labour party faced an internal backlash after its National Executive Committee blocked Greater Manchester mayor Andy Burnham from seeking selection for the Gorton and Denton byelection. This attracted criticism from MPs, unions and senior figures. Prime Minister Keir Starmer and most NEC officers voted against granting permission, citing the cost and disruption of triggering a mayoral election. Burnham said he was disappointed and criticized how the party is being run, while unions including Unison said members would be angry. MPs across factions described the move as a mistake and factional, with figures such as Angela Rayner, Ed Miliband and Sadiq Khan having supported Burnham standing. Starmer allies defended the decision as protecting party resources and electoral stability. FTSE 100 -0.032% to 10140.24, GBPUSD +0.184% to 1.3668, 10y gilt -2.8bp to 4.484%.

South Korea’s National Pension Service (NPS) has cut its 2026 target allocation to overseas equities to 37.2%, from an initial 38.9%, according to an emailed statement from the welfare ministry. The NPS has raised its domestic equity target allocation to 14.9% vs. 14.4% and is temporarily deferring rebalancing when allocations deviate from the permitted range under the strategic asset allocation. It intends to closely monitor markets in H1 to review the strategic asset allocation range and adjust it if needed. As of end-2025, the NPS’s domestic equity allocation was 14.9%, with overseas equities at 35.9%, domestic bonds at 26.5%, overseas bonds at 8% and alternative investments at 14.7%. Its end-2026 targets are now 14.9% for domestic equities, 37.2% for overseas equities, 24.9% for domestic bonds, 8% for overseas bonds and 15% for alternative investments. KOSPI -0.811% to 4949.59, USDKRW -1.845% to 1437, 10y KTB +3bp to 3.58%.

What We're Watching

U.S. November Chicago Fed National Activity Index expected at -0.20 vs. -0.21.

U.S. November durable goods orders forecast to rebound to 3.8% m/m from -2.2% in October, the ex-transportation measure is expected at 0.3% vs. 0.1% in October.

U.S. January Dallas Fed manufacturing activity is expected to improve to -8.6 from -10.9.

Central bank speakers: ECB Governing Council member Joachim Nagel discusses monetary policy in the German parliament; ECB Governing Council member Martin Kocher speaks on monetary policy and behavioral economics.

U.S. Treasury is selling $89bn in 13-week bills, $77bn in 26-week bills and $69bn in new 2y notes.

What iFlow is Showing Us

Mood: iFlow Mood has continued to drift higher, driven by selling in core sovereign bonds and increasing demand for equities. iFlow Mood is at 0.416, have broken through its high of July 2024 and just shy of January 2022 levels.

FX: Mixed and light currency flows. Flat USD and light EUR and NZD inflows against GBP, JPY and AUD outflows within the G10 complex. Elsewhere, SGD and ILS were most sold, against relatively good demand for COP, PLN and CNY.

FI: Indonesian government bonds stood out, being sold at a significant pace, followed by Chilean and Israeli government bonds. There was notable cross-border investor selling of the >10y part of the curve. Japanese and Mexican government bonds were bought.

Equities: European, Indian and South African equities were most sold, against buying in South Korea, Malaysia, Japan, Australia and China.

Quotes of the Day

“Wisdom is the reward you get for a lifetime of listening when you’d have preferred to talk.” – Doug Larson

“There is a difference between listening and waiting for your turn to speak.” – Simon Sinek

Economic Details

Germany’s January ifo business climate index was unchanged at 87.6, below market expectations of 88.3 and matching December’s reading, indicating a weak start to the year. The current conditions index edged up to 85.7 from 85.6, while business expectations eased to 89.5 from 89.7. The ifo Institute said company sentiment remained subdued, with slightly better assessments of the present offset by more cautious expectations. By sector, manufacturing sentiment improved appreciably despite a fall in capacity utilization to 77.5%. The business climate deteriorated in services, with weaker logistics and tourism. Retail and wholesale sentiment rose but remained well below their long-term averages, while construction confidence improved on better current activity, even as order books, particularly in building construction, stayed weak. DAX -0.165% to 24859.52, EURUSD +0.279% to 1.1861, 10y Bund -2.4bp to 2.882%.

Spain’s provisional industrial producer prices for December fell 3.0% y/y, down five-tenths from November, while prices were up 0.4% m/m. The y/y fall was driven mainly by energy, where prices dropped 10.8% y/y due to lower petroleum refining prices and weaker gas production, partially offset by higher electricity prices. In contrast, non-durable consumer goods prices increased by 1.1% y/y, reflecting higher prices for vegetable and animal oils and fats. Excluding energy, the IPRI rose 0.8% y/y, standing 3.8 percentage points above the headline rate. All autonomous communities recorded negative annual rates, with the steepest declines in the Canary Islands, the Balearics and Asturias. IBEX 35 +0.538% to 17631, EURUSD +0.279% to 1.1861, 10y Bono -2.9bp to 3.243%.

Spanish housing mortgage activity strengthened in November, with the number of mortgages on homes rising 12.4% y/y to 43,319, according to provisional INE data. The average mortgage amount increased by 11.7% y/y to €170,771, while total capital lent for home purchases rose 25.6% y/y to €7.40bn. On a m/m basis, the number of home mortgages fell 17.0%. The average interest rate on new home mortgages stood at 2.97%, with 61.5% of loans issued at fixed rates and 38.5% at variable rates. Mortgages with registered changes declined by 32.8% y/y, driven by sharp falls in subrogations, while Cantabria, Valencia and Andalusia recorded the strongest regional growth in mortgage numbers.

Polish retail sales rose 5.3% y/y at constant prices in December, accelerating from a 1.9% increase a year earlier, while sales jumped 12.5% m/m. On a seasonally adjusted basis, retail sales were up 4.7% y/y and 0.2% m/m. Over January-December, retail sales grew 4.3% y/y, compared with 2.7% in the same period of 2024. By category, the strongest y/y gains were recorded in furniture, radio, TV and household appliances (+19.8%), motor vehicles and parts (+13.1%) and pharmaceuticals and cosmetics (+8.4%), while food, beverages and tobacco rose 1.9%. Online retail sales increased by 4.5% y/y, with their share edging down to 10.1% of total sales. WIG +0.465% to 122908.4, EURPLN -0.053% to 4.2113, 10y PGB -1.7bp to 5.108%.

Poland’s January business tendency survey showed an improvement in overall economic sentiment, with the GUS general synthetic indicator rising to 100.2 from 96.7 in December, moving above its long-term average. The manufacturing climate indicator improved m/m to -4.1 from -11.6, while construction also strengthened to -5.6. Retail trade remained negative at -2.7 but improved slightly m/m, and transport and storage rose to -0.4. Services were mixed, with accommodation and food services turning positive at 3.0, information and communication increasing to 12.1, and financial and insurance activities staying elevated at 25.4. Capacity utilization in manufacturing stood at 77.9%, while firms across sectors reported lower uncertainty but increased competitive pressure.

Czech January economic sentiment was unchanged m/m, with the composite confidence indicator holding steady at 100.2, according to official data. Business confidence increased modestly by 0.6 points to 98.6, while consumer confidence declined by 2.8 points to 108.2. Within business sectors, confidence rose m/m in selected services by 1.3 points, in industry by 0.5 points and in trade by 0.3 points, while construction was the only sector to record a decline, falling 4.7 points. On the household side, a higher share of consumers expected the overall economic situation to deteriorate over the next 12 months, more respondents assessed their current financial situation as worse than a year earlier, and the proportion planning no major purchases increased, despite a slight rise in households expecting their finances to improve. Prague SE +1.231% to 2752.42, EURCZK +0.005% to 24.272, 10y CZGB -0.6bp to 4.538%.

Japan’s revised November 2025 Business Conditions Index points to a bottoming out in cyclical momentum, with the CI coincident index revised down slightly to 114.9 (from 115.2). However, the Cabinet Office is maintaining its assessment that activity is “showing signs of a pause in the decline.” The leading index was revised down to 109.9 (from 110.5), with the monthly gain trimmed to +0.1 points, reflecting softer contributions from real machinery orders and housing starts, partly offset by firmer consumer sentiment, equity prices and M2 growth. The coincident index fell by 1.0 points m/m, driven by declines in industrial production, shipments, labor input and wholesale sales, despite support from investment goods shipments and exports. By contrast, the lagging index was revised up to 112.9 (from 111.5), rising +0.7 points m/m, underpinned by wage income, household spending and corporate tax receipts, signaling resilience in income-side indicators. Overall, the revisions have marginally tempered the near-term outlook but are consistent with a stabilization narrative rather than a renewed downturn, with domestic demand indicators uneven while income and financial conditions remain supportive. Nikkei -1.786% to 52885.25, USDJPY +1.058% to 154.07, 10y JGB -1.9bp to 2.238%.

December condominium prices in the Tokyo metropolitan area rose 15.5% y/y to an average of ¥84.69mn, up from ¥73.35mn a year earlier, says the Real Estate Economic Institute. Price gains were led by central Tokyo, where prices increased 36.7% y/y, following 14.1% in November and 18.3% in October. Tokyo suburbs recorded a 10.7% y/y rise, while Kanagawa prices rose 3.5% y/y following declines in November and October. Saitama and Chiba saw increases of 12.8% y/y and 6.5% y/y, respectively. Units supplied in the metropolitan area totaled 5,468 in December, compared with 1,910 in November, while average prices declined m/m from November levels across most areas.

Singapore December industrial production rose more than expected, at 8.3% y/y (November: +18.2%), driven primarily by a strong rebound in electronics, while headline growth continued to be distorted by volatility in biomedical manufacturing. Excluding biomedical output, manufacturing expanded by a robust 16.0% y/y, highlighting broad-based momentum across cyclical clusters. On a seasonally adjusted m/m basis, total output fell 13.3%, reflecting a sharp pullback in pharmaceuticals after an exceptionally strong Q4, while non-biomedical output decreased by a more modest 4.9%. By cluster, electronics surged 30.8% y/y, led by semiconductors (+32.4%) on sustained AI-related demand, while transport engineering rose 19.9% y/y, supported by strong aerospace production and maintenance activity. Precision engineering grew 3.4% y/y, while chemicals declined by 1.6% y/y amid petrochemical weakness. In contrast, biomedical manufacturing contracted by 38.8% y/y, as pharmaceuticals output plunged 69.7%. On a three-month moving average basis, total manufacturing growth remained strong at 18.8% y/y, indicating underlying momentum into 2026 despite near-term volatility. STI -0.574% to 4863.38, USDSGD +0.221% to 1.2699, 10y SGB -0.8bp to 2.134%.