US and Japan flirt with joint currency intervention

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Good morning from the Financial Times. Today is Tuesday, January 27th, and this is your FT News briefing. The U.S. has controversial conditions for Ukrainian security guarantees. And the Yen took a leap yesterday. Plus, big tech is going on a massive borrowing spree. I'm Sonia Hudson, and here's the news you need to start your day.

The US is linking security guarantees for Ukraine to giving up territory to Russia. The Trump administration has indicated to Kyiv that it would need to agree to a peace deal that involves ceding the eastern Donbass region. That's according to eight people familiar with the talk. The White House said, quote, this is totally false. Ukrainian President Vladimir Zelensky's office did not reply to a request for comment.

Ukrainian and European officials described the US stance as an attempt to strong arm Kyiv into making painful territorial concessions. Giving up the Donbass has been a red line for Zelensky and for a majority of Ukrainians, according to polling earlier this month.

The dollar sank to a four month low yesterday, but the Japanese yen kept climbing and climbing. It leaped up one percent to the dollar. There's speculation that the US and Japan could be working together to support the yen. I'm joined now by the FT's senior markets correspondent Ian Smith to tell us more. Hi Ian. Hi, Sonia. So what signs do we have that there could be a joint currency intervention?

So as you've said, we've seen a dramatic appreciation in the Japanese yen against the US dollar on Monday following a big jump. On Friday, as speculation swirls that the US and Japanese authorities are working together to strengthen the yen, which had fallen to an eighteen month low against the dollar earlier this month. And on Friday, uh, traders reported that the US authorities had done what is called a rate check on banks.

where they ask them about where they are positioned on dollar yen and this traditionally a very kind of old school way of preparing the ground for a a currency intervention. So given that, market participants are questioning will this be perhaps a joint intervention with the US? So why does Japan want to prop up the yen?

So yeah, the yen has been weakening for some time now before this latest rally, and that's partly because some people think that the Bank of Japan, which is increasing interest rates, won't be able to move as quickly as the market had hoped. But also because Japan's new Prime Minister has promised a big stimulus package and has now uh announced a snap election.

So, people are kind of expecting more fiscal stimulus in Japan, which is boosting stocks but weakening the currency and adding to some concerns in the market about the sustainability of Japan's. vast government debt. Okay. So obviously it makes sense for Japan to want to prop up its currency here when it's worried about it weakening. But why would the US want to get involved with this, especially since strengthening the yen is weakening the dollar?

In part that would be to protect its uh exporters against a sudden appreciation of the US dollar against the yen. Which would make it more expensive for Japanese importers to buy American products. Exactly. And then you also have this point that the US does not want to see a disorderly sell off in the Japanese bond market. So what's been happening is that Japanese bonds have weakened with the currency and that has bred volatility also in the US government bond market. So you've got this

situation where there's an aligned interest from US and Japanese authorities not to see a deepening sell off in the Japanese government bond market and currency that could create volatility in the US. What kind of knock on effect Could we see or are we seeing outside the US and Japan? This is not happening in a vacuum. The US dollar had its worst week since May last week as the Greenland crisis reawakened some of those investor concerns around uh erratic US policy making.

So this has really piled some more pain on that. Um, and it's sending some investors looking for other haven currencies. So we've seen the Swiss franc uh do very well and we've seen the Euro strengthen. Hm. Do you think we could see more intervention in foreign currency markets going forward? It's definitely a possibility. It's really interesting to see the Swiss franc.

which has now reached its strongest levels against the dollar since twenty fifteen. And uh the Swiss franc is appreciated strongly. And at some point that poses challenges to Switzerland through deflationary effects.

And through the yeah, the challenges it poses to the Swiss economy. So Switzerland did agree with the US in September that it would not manipulate its exchange rate, but the statement also recognised that market interventions can be a valid tool for addressing big periods of volatility in currencies.

or disorderly moves in exchange rates. So it would perhaps come down to whether any intervention was deemed justified from a kind of broader fall in the dollar and appreciation in the Swiss franc that kind of moves ahead of economic fundamentals. All right, well sounds like the yen, the dollar, and the Swiss franc are spaces to watch. Ian Smith, the FT's senior markets correspondent. Thanks so much. Thanks a lot. חבריי וחברותיי, חברות וחברי הכנסת.

Lifnesha Akala, Ishavno Abita, Etranik Vili, Gibor Israel. That's Israel's Prime Minister Benjamin Netanyahu. And Yotel Khattufim Beazah.

Yesterday he announced that the country retrieved the remains of the last Israeli hostage in Gaza. They are of Ron Gavili, a police officer who Hamas killed during the attacks on October seventh, twenty twenty three. More than two hundred and fifty hostages were taken and twelve hundred people were killed that day. It triggered two years of devastating fighting in Gaza.

The US brokered a ceasefire deal in October. It's mostly held. The Trump administration announced last week the start of the so-called phase two of the deal and a new governing structure for the shattered enclave.

Big tech is on track to dominate the US bond market. By 2030, half of the 10 largest borrowers in the U.S. investment grade corporate bond market will be so called hyperscalers. That's your alphabets, your Amazons, your Meta, companies that are building enormous AI data centers. This is all according to Apollo Global Management. And the shift could expose some of the world's safest securities to greater risk. I'm joined now by the FT's Michelle Chan. She covers US credit. Hey Michelle.

Hi, thanks for having me. Thanks for being on the show. So as I understand it, there's two things happening here. One is tech giants are piling into the bond market, and two, banks are pulling back. Why is that? Sure, you're absolutely right. So tech giants are leaning into the US investment grade bond market because it's really the cheapest way for them to fund this massive AI infrastructure.

Um the US investment great bond market is very liquid, very big, is worth ten trillion dollars. So doing that would be a lot cheaper than borrowing from like private credit, for example. And the banks, um, which are the long time borrowers in the market, they are retreating because they now expect this kind of regulatory relief that would allow them to hold less capital on their balance sheets in the long run.

And people in the market are expecting that that will reduce their borrowing need over the f next few years. How dramatic is this shift? Like how quickly have we seen the makeup of the corporate bond market change? So from the Morgan Stanley forecast, we are expecting about four hundred billion dollars in AI and hyperscaler related issuance this year.

Which is up from just forty four billion dollars in twenty twenty four, so we are talking about almost like a, you know, tenfold increase in just two years. Wow, that's incredible. Um, what impact has this already had on the bond market? One of the most notable examples are the borrowing costs of the more indebted companies, including Oracle.

So since Oracle borrowed eighteen billion from the bond market last September in just a matter of Three and a half months, their borrowing cost is already zero point seven five percentage points higher than it was. It's very important to note that these companies are huge and even one percentage point of an increased borrowing cost could cost them billions of dollars in the long run.

So it's very i important for these companies to keep their credit rating and it would cost a lot for both the company and existing bondholders if their future um borrowing cost is increased. What are some of the long term consequences of this shift? This is a very good question. Some investors are worried that this would mean that they have more concentrated AI risk in their portfolios because a lot of the tech companies are already f uh, you know, a heavy player in the equity market.

And if we are also very exposed to tech names in the bond market, it would mean that across portfolios we have a very concentrated AI risk. And there's also concern that this kind of AI infrastructure would not be profitable um until years later or not at all. So there are concerns among investors that there are overcapacity problems in the industry as a whole and that would weigh down on the entire investment grade universe.

Michelle Chan is the FT's US credit correspondent. Thanks, Michelle. Thank you. Before we go, it's getting harder for recent college graduates to land their first jobs. If this is something you're experiencing, we want to hear from you. Send us a voice memo with your name, where you're from, and how you're navigating this job market. And we may even play it on the show. You can find more information in the show notes.

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