Could precious metals meltdown serve as an FX catalyst?

FX struggles to find a pulse as precious metals stole most of the thematic limelight.
The recent consensus seems to have been that all fiat currencies should be consigned to the “devaluation trade” against the mighty precious metals, with the yen receiving a bit of extra negative attention because of its exceptionally low interest rate and the general idea that the new government would like to run the economy hot. The US dollar correction never worked up any head of steam and the direction there is in complete limbo, while it is somewhat doubtful that the FOMC can bring fresh momentum this week.

Could JPY strength emerge as a theme?
Now we are witnessing a vertigo-inducing correction in precious metals that suggests that at least the first major leg of this devaluation trade has ended and is unlikely to re-fire in the near term. This has not fed into any new volatility in FX, but the spectacular end of the metals rally could open up FX for new thematically-induced trends. Among these could finally be an end to the JPY sell-off for entirely new reasons than those that have traditionally supported the JPY.

As long as we can dismiss notions that global bond markets are suffering near term instability and US treasury yields remain low or lower, Japan’s new policy mix could inspire a repatriation of capital – NOT for the traditional reason of risk off, but because Japan is launching its own version of large scale investments in national security that the US has announced: set to build ships for itself and allies, bolster defense and secure energy security, critical minerals supply chains, etc. This could see Japan’s savers bringing back their funds to invest in the boom, with foreign investors doing likewise, possibly eventually without currency hedging. Some deregulation that inspires consolidation across Japan’s equity market, which currently features the most listed companies of any major stock market, could drive investor interest as well. Some of the details here, by the way, are inspired by a great post over on the Dark Side of the Boom substack on the JPY’s “repatriation reawakening”.

Of course, for now, there is absolutely no evidence that this idea is catching on, but I suspect that the end of this precious metals rally could see macro traders pivoting to new themes here, so will watch for solid technical signs of the JPY reversing course. For now, it is an idea with no traction, although with long term JPY vol in crosses like EURJPY near three-year lows, expressing an opinion is less expensive than it has been previously. And conveniently as I am writing these thoughts, I see Bloomberg is running a story that Goldman Sachs sees USDJPY pushing back toward 100 in the coming ten years as policy normalizes.

There are four central bank meetings over the coming two days. Wednesday will feature (Bank of Canada and FOMC) and Thursday (Bank of Japan and ECB) – a brief preview of all of these below the chart.

Newsflash: GBP is stumbling badly this morning, with EURGBP challenging the very top of the  range since early 2023 as the UK Office of Budget Responsibility is out with new guidance that Chancellor Rachel Reeves faces a larger than expected gap in the budget of GBP 20 billion due to lower than anticipated productivity figures.

Chart: EURJPY.
EURJPY managed to rally all the way to new all-time highs in the euro-trading era, taking out the previous all-time high from just earlier this month at 177.94. It’s far too early to call this a reversal, but we do have a classic momentum divergence setup here, though really a massive slide to perhaps 173 or lower is needed to suggest a significant rejection of this latest rally – at minimum a challenge well through the 175.00 level that is clearly pivotal.