The US dollar is experiencing a decline against all the G10 currencies. The ongoing short squeeze is driving the yen higher, despite Japan being on holiday today. The yen and Japanese bonds have shown resilience, rallying following the LDP’s decisive electoral win. The interplay of a stronger yen alongside declining yields may resemble a typical “sell the rumor, buy the fact” scenario; however, the rally in JGBs initiated prior to the election. Yesterday’s underwhelming retail sales led to a decline in US rates. The two-year yield decreased by three basis points, settling at approximately 3.45%. The figure stood at 3.57% at the start of the previous week. The US 10-year yield decreased by six basis points, settling at approximately 4.14%. The figure was approximately 4.28% at the beginning of the previous week. As we approach the release of today’s US employment data, it is anticipated that the report will validate the notion that the US labor market has been weaker than previously perceived, especially in light of the benchmark revisions. Another significant point of interest in North America today pertains to the US’s confrontation with Iran. A climax seems to be on the horizon. The results of President Trump’s discussion with Israel’s Prime Minister Netanyahu are regarded as crucial. The results of the meeting are expected to be available around 2:00 pm.

The euro maintained a limited range yesterday. The underwhelming US retail sales reinforced support near $1.1885, while purchasing activity waned just ahead of $1.1930, slightly above Monday’s peak. The asset is approaching resistance once more, and in the current bullish consolidation, it appears ready to continue its upward trajectory in North America, with the next target set at approximately $1.1960. Two additional observations are worth noting. Initially, the premium of US two-year yields over Germany reached its peak last month, just shy of 155 basis points. Currently, it stands below 140 basis points, with the potential risk of further narrowing, possibly influenced by soft US jobs data, which includes benchmark revisions and adjustments for new census population estimates, as well as the dynamics of business starts and failures—often referred to as birth/death adjustments. Second, the euro experienced a brief dip to a new multiyear low against the Swiss franc yesterday, just under CHF0.9100. The current level has not been observed since the spike in 2015. Switzerland is set to release its Consumer Price Index for January this Friday. The EU harmonized rate is expected to remain steady at 0.2% year-over-year.

The situation presents a dilemma: while low inflation and a robust franc would typically support a more accommodative monetary policy, the policy rate is currently at zero. Intervention presents complexities that may not be immediately evident. To maintain the currency distribution of its reserves, should it purchase euros and divest Swiss francs, it would subsequently engage in the market to sell euros and acquire dollars. The act of intervening to devalue the Swiss franc, despite Switzerland’s current account surplus nearing 8.5% of GDP, may provoke a reaction from the unpredictable US administration. A significant short squeeze persists in driving the yen higher, despite the closure of Japanese markets for National Foundation Day. Prior to the weekend election, the dollar positioned itself around JPY157.25. In North America, yesterday, the dollar approached JPY154.00. Today, the dollar has reached JPY152.80, marking its lowest point since January 30. Last month’s low was around JPY152.10, with the lower Bollinger Band positioned slightly lower at JPY152. It found stability late in the Asia Pacific session and in Europe, though initial resistance could now be positioned around JPY153.60. Following a two-day rally of nearly two cents, sterling has reached a standstill. It experienced consolidation within a range slightly exceeding half a cent beneath the $1.37 mark yesterday. The asset experienced session lows late in North America but rebounded today, achieving a new five-day high just above $1.3700. Resistance levels are identified around $1.3730.

The Canadian dollar achieved a new monthly peak yesterday in North America and is showing slight strength today. The US dollar experienced a decline, dipping just below CAD1.3525 and approaching CAD1.3500 today. Last month’s low (~CAD1.3480) shows minimal testing, marking the weakest position for the greenback since October 2024. The Australian dollar stabilized yesterday, hovering around a third of a cent below $0.7100. The disappointing decline in December household spending at the start of the week may have dampened enthusiasm; however, in the futures market, the probability of a subsequent hike remains elevated (80%+). Amid the general weakness of the US dollar, the Australian dollar climbed to nearly $0.7130, marking a new three-year peak. The subsequent chart area of significance is approximately $0.7160.