The MUFG Global Markets Podcast Sep 18, 2026 18m 8m saved
With Derek Halpenny, Head of Research Global Markets, EMEA and International Securities at MUFG
The overnight index swap market has three more Federal Reserve hikes priced by the middle of next year. The Fed's own projections show one.
That gap is usually read as the market knowing better than the committee. Derek Halpenny reads it the other way round, which is why he expects the dollar to keep rising for a few weeks and then give it back.
"So I do think we're overdone. We're not going to get three hikes delivered"
Halpenny runs research for global markets across EMEA at MUFG and publishes the house FX forecasts that corporate hedgers price against; this week he raised his rate forecasts for the Fed, the ECB, the Bank of England and the RBA at the same time.
The full episode is covered here so you can skip it. 18 minutes of audio, 10 minutes of reading.
Here are the 8 calls that matter.
Key Takeaways
The swap market prices rates at 4.63% by the middle of next year, three more hikes, against one in the Fed's own projections
Halpenny expects a dollar overshoot over weeks, possibly months, and then a retracement rather than a new trend
Brent above $100 a barrel and a French-German 10-year spread above 100 basis points are both working for the dollar
MUFG now has the ECB peaking at 3%, two more hikes, which is what keeps the euro forecast alive
Dollar-yen fell 4% in the first five trading days of September on one board member's speech, and is only just past halfway back
The short euro-yen trade is closed at around 177, and he does not expect corporate buyers to get that level again soon
The Bank of England will keep £120B of gilts maturing beyond 2049 to maturity instead of selling them
Everything else the Bank sells now goes to the government rather than the market, and the 30-year yield fell 12 basis points on the news
1. The Fed's Dots vs the Market
The Fed raised rates this week, which was expected. Halpenny said the interpretation of the press conference and the surrounding communication was that the committee is not finished.
Warsh called it the removal of a dose of accommodation
Kevin Warsh kind of referred to the removal of a dose of accommodation, suggesting there's still more accommodation
Derek Halpenny
The projections put one further hike this year, no change next year, and a cut in each of 2028 and 2029. Most of the move in US yields had already happened before the meeting, on the inflation data that preceded it, with the market well positioned going in.
The swap market prices three more hikes
So the OIS market has basically rates moving higher to 4.63 in the middle of next year. So another three hikes.
Derek Halpenny
That is the gap the dollar has to trade around. Halpenny said the projections should work as a brake on how far rates pricing can run from here, while conceding that positioning and momentum can carry US rates past what the Fed has signaled first.
He thinks the pricing is overdone
So I do think we're overdone. We're not going to get three hikes delivered
Derek Halpenny
2. What Else Helps the Dollar
Rates are not the only support. Halpenny named three others, and none of them is American.
Oil and French politics both point the same way
Energy prices now obviously settling above $100 a barrel on Brent. French political risks have been building. The OAT-Bund spread above 100 basis points for the first time since 2012.
Derek Halpenny
The OAT-Bund spread is the yield gap between French and German government bonds. A full percentage point of it is the widest since 2012, and it is a cost Paris pays rather than Berlin.
Higher rates raise the odds of an equity shakeout
And then just general risk conditions, if rates stay up at these levels there's certainly a bigger risk that you could get some increased volatility in risk assets.
Derek Halpenny
Put those alongside the risk of a rates overshoot and the conclusion is a stronger dollar for a while. He put the window at weeks and possibly months, then a retracement, with the medium-term move contained.
3. The Euro Forecast Holds
The host recapped the case Halpenny had been making earlier in the year for a weaker dollar: a labor market he did not think was as hot as the market priced, inflation risks he thought had peaked, and tariff effects he thought were overdone in the pricing. He asked whether any of that had changed.
The mid-year euro target survives, with the level nudged
So just to remind listeners, by the middle of next year we had kind of 1.20-ish for euro on a DXY basis, that would translate into about a 4% drop.
Derek Halpenny
The forecasts are generally intact, he said, though the levels may shift to show a slightly stronger dollar than the ones MUFG published. How much depends on how far the near-term move runs.
4. The ECB Goes to 3%
The reason the euro forecast survives a more hawkish Fed is that MUFG raised its forecasts for almost everyone else at the same time. The Fed is now expected to hike twice, two more than the firm originally had, and the Bank of England and the RBA have gone up as well, with the Bank of Canada under review.
The ECB now has two more hikes in it
So across G10, we're raising a lot of our monetary policy forecasts as well, and we now have the ECB moving two more times to a peak policy rate of 3%.
Derek Halpenny
For the euro, the ECB is the only other central bank that counts
So, from a G10 FX perspective, that's probably the most important other central bank to look at.
Derek Halpenny
If the ECB delivers what MUFG expects, he said, the grounds for a higher euro by the middle of next year are still there.
5. The BoJ Retrace
The Bank of Japan also hiked. Dollar-yen went up rather than down, and the host asked whether that was a surprise.
The BoJ could not match what was already priced
Yeah, I think the BOJ had a very difficult task today to basically match the hawkishness that had ultimately come into the market in terms of expectations about BOJ policy going forward.
Derek Halpenny
A 4% move in five days set the bar that high
And really let's not forget that at the beginning of September, basically in the first five trading days of September, dollar-yen dropped by 4%, from 160 to 154, a little bit below 154, so nearly 4%.
Derek Halpenny
Halpenny traced that to two speeches on 2 September, one by Governor Kazuo Ueda and one by Hajime Takata, the board's most hawkish member. Takata's was the one that moved the market.
Takata floated a bigger move, or two in a row
But it was Takata's speech where he mentioned the prospect of a potentially larger than 25 basis point move, or even back-to-back hikes.
Derek Halpenny
Ueda did not repeat any of it this week, which is why the September move is unwinding. Halpenny was careful about the distinction between not confirming a hawkish idea and being dovish.
Ueda was clear rather than dovish
I don't think Governor Ueda was dovish today. I think he gave a very sensible message, a very clear message
Derek Halpenny
The retrace has further to run on that logic: he said dollar-yen is "still only just above halfway retraced" from the September drop, and could keep rising if the broader dollar does. MUFG's own path is another hike, possibly in December, and one more in the second quarter of next year, taking the policy rate to 1.75%.
6. No Cheap Euro-Yen
For European corporates the cross that matters is euro-yen, not dollar-yen. The host said many of them have been waiting for a better level to buy the euro for months, quarters and almost years, that the cross has come down from 187 or 188 to below 180, and that some are hoping for 160. On client calls, he said, the yen is the one variable that never comes down in any significant way.
The short euro-yen trade is closed
So those who read our FX Weekly, we've been running a trade view short euro-yen.
Derek Halpenny
It worked down to about 177. Then, in his words, "That looks like it's run its course. So we've closed out that position."
The level the hedgers want is not coming back soon
So again in answering your question, the opportunity to buy euro-yen at those levels, I don't think we're going to get that opportunity again over the short term.
Derek Halpenny
His reasoning is arithmetic rather than a view on Japan. Over the short term he sees more room for dollar-yen to get back to 160 than for euro-dollar to fall much, which leaves euro-yen with no obvious way down. The one route that would take it lower quickly is a global equity drawdown, which is the same risk-asset scenario he flagged earlier.
Further out he still has the cross lower
And again, in that context, we would certainly expect lower euro-yen in 2027.
Derek Halpenny
7. A November Hike at the BoE
The Bank of England left its policy rate unchanged on a 6-3 vote, the same split as the previous meeting, and euro-sterling bounced on the announcement. The vote was not the news; the explanations behind it were.
Four of the six who held rates said a hike is building
Of the six who voted to keep rates on hold, Governor Bailey, Clare Lombardelli, Sarah Breeden, and Dave Ramsden all indicated in their individual explanations that the case for a rate hike could be building based on energy price risks.
Derek Halpenny
He expects the hike on 5 November
So, I think we're being set up for a move in November. That's our view, and we expect a hike unless there's a dramatic drop in energy prices between now and the 5th of November when the MPC next meets.
Derek Halpenny
The condition attached to that is energy, the same thing driving the dollar in section two. A sharp fall in prices before the meeting is the one thing he said would stop it.
8. The Gilt Sales Stop
The bigger development, Halpenny said, was what the Bank did to its bond sales. It had been selling gilts outright into the market, and long-dated yields had been paying for it.
All gilt sales are paused until at least April
So they've basically paused all gilt sales until at least April next year while they discuss the intricacies of the plan that was announced.
Derek Halpenny
The longest gilts come off the market for good
120 billion worth of gilts maturing beyond 2049 will be kept on the balance sheet until maturity.
Derek Halpenny
That is £120 billion of supply that the market now knows it will never have to absorb. The tranche below it gets a different treatment.
The rest is sold to the government, not to investors
And then another 146 billion of gilts maturing between 2035 and 2049 will be sold, 20 billion per year, but directly to the government via the DMO, so not to the market, as has been taking place up until now.
Derek Halpenny
The DMO is the Debt Management Office, the agency that issues gilts on the Treasury's behalf. Selling to it takes the paper off the Bank's balance sheet without a buyer having to be found for it.
The 30-year yield fell 12 basis points
So, basically we're knocking out a level of supply that was going into the market, and the 30-year yield dropped yesterday by 12 basis points.
Derek Halpenny
Halpenny compared the mechanism to the US Treasury's, calling it "similar to what Scott Bessent did" in reducing the supply going to the market, while noting that a central bank altering its own quantitative tightening program is a different act from a debt manager changing issuance. He read the decision as an acknowledgment of what the Bank's own sales had been doing to long-term rates.
For sterling itself he was unmoved. The pound weakened partly on the announcement, but better gilt sentiment is not a negative for the currency, passive quantitative tightening continues, and the rate hikes are still coming, so he said it is not "a gamechanger in terms of the sterling FX view."
Bonus Insights
The dollar leg and the euro leg are one trade
FX rates are relative prices, so euro against dollar.
A host
The host used the line to move the conversation off the Fed and onto the ECB, which is the same point Halpenny then made about why his euro forecast survived a more hawkish Fed.
Two dissents, and neither one moved the yen
We did have two dissents, Toyoaki Nakamura and Naoki Tamura.
Derek Halpenny
Both are the newest members of the board, appointed under Prime Minister Takaichi, and both are reflationists and known doves, so Halpenny said their votes were no surprise. He specifically declined to use them as an explanation for the day's move in dollar-yen, which he put down to the broader unwind of the September hawkishness instead.
Halpenny's bottom line is that the dollar can extend its rally for weeks or months on a rates overshoot, expensive oil and French political risk, but that a swap market pricing three Fed hikes against a committee showing one is the thing that eventually reverses it.
Books & Resources Mentioned
MUFG FX Weekly (The house publication where the short euro-yen trade view was run, and where it was closed)
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