US tech stocks are turning volatile amid earnings and concerns of escalating AI spend, which could pressure US yields and the USD lower. If tech valuations are to falter, this could undermine a current surge in AI related investment, possibly weighing on the US growth outlook and the USD. Meanwhile, a US strike force is massing in the Middle East, with US-Iran tensions remaining highly elevated despite subsiding protests in Iran. Media reports suggest that Trump is now weighing an attack on Iran to inspire renewed protests. An ensuing retaliation could wreak havoc on global energy supply chains and shipping lanes, and safe havens like the CHF and JPY could stay bid given geopolitical risks.
USD/JPY has stayed near lows around 153, despite Bessent disclaiming the possibility of a US market intervention with Japan. Markets have got the message from the USD/JPY rate check by NY Fed last Friday as a signal of Japanese intervention intent, with JPY sustaining its gains against both the USD and EUR. PM Takaichi would not like excessive JPY weakness to affect her election campaign and has said that Japan will take measures to address speculative and abnormal market moves. Polls indicate that the LDP is on track to get a majority in the Lower House due to her personal popularity.
The US Treasury has added Thailand to its monitoring list for its semiannual FX report, while China, Japan, Korea, Taiwan, Singapore and Vietnam remain on the list. For China, the US Treasury elaborated that it was not designated as a currency manipulator amid RMB depreciation pressures over the Report period, but this does not preclude such a designation in future if China resists RMB appreciation. With USD/CNH tracking around 6.95 and being a tad below the USD/CNY fixing, China could allow gradual RMB appreciation with a more market-determined fixing. Such a move will align well with improving fundamentals underscored by a strong equity market, and a deeply undervalued RMB.
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