Global equity markets surged following the announcement of a new trade agreement between the United States and Japan. Investors welcomed the move as a sign of reduced geopolitical uncertainty, yet reactions in the currency markets were mixed, particularly for the Japanese yen, which faces political headwinds amid speculation that Japanese Prime Minister Shigeru Ishiba may resign.
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President Trump described the deal as a “win-win”, highlighting reduced US tariffs on Japanese goods, “only” 15% compared to the previously threatened 25%, and Japan’s commitment to purchase US planes and rice. Notably, Japan has also agreed to create a $550 billion sovereign wealth fund to invest in the US under Trump’s direction, though analysts remain sceptical about the feasibility of that pledge.
Markets responded with optimism. Japanese equities rose 3%, 10-year Japanese government bond yields climbed 6 basis points, and short-term interest rate expectations also increased. However, the yen remained flat against the dollar. According to ING analysts, ‘That probably has to do with politics. Having got the trade deal over the line, it looks like Prime Minister Shigeru Ishiba is ready to take responsibility for the poor Upper House election result and resign.’
The political uncertainty casts doubt over future fiscal policy and the independence of the Bank of Japan. ING noted: ‘With so much uncertainty and low volatility still favouring carry, we do not see a strong rationale for the yen to trade a lot stronger from here.’
Meanwhile, commodity currencies such as the Australian dollar, Brazilian real, and South African rand gained ground as industrial metals rallied. ING suggested these currencies may serve as inflation hedges, especially if Federal Reserve Chair Jerome Powell is ousted and monetary policy shifts.
In Europe, the euro remained quietly firm, with EUR/USD pushing past 1.1720, possibly due to increasing investor interest in euro-denominated assets. ‘Global investors are showing a keener interest in euro-denominated products, and issuers are obliging,’ ING observed.
In Central and Eastern Europe, the Hungarian forint and Polish zloty were stable but lacked clear momentum. While Hungary’s central bank cut its required reserve ratio, the decision was viewed as neutral. Poland’s weaker-than-expected retail and industrial data signalled dovish shifts ahead, with potential rate cuts on the horizon.
As global macroeconomic narratives shift, European investors, particularly those exposed to currency volatility and international sourcing, are advised to monitor developments in US-Asia relations and their ripple effects across FX and commodity markets.
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