USD
The US Dollar traded unevenly, showing a softening trend against major peers like the Euro and Japanese Yen due to improved global risk sentiment. Speculative positioning has become heavily skewed toward USD selling, with gross short positions across eight IMM currency futures more than doubling to a six-month high of USD 17.4 billion.
JPM economists continue to see global GDP staying resilient at 2.8%, with consumers as a key driver. GS economists anticipate a +45k headline NFP print and a 33bp core CPI reading for January, noting that January reports often provide outsized FX reactions. Nomura reported that year-ahead inflation expectations in the NY Fed Survey of Consumer Expectations moved lower to 3.09%, the lowest since July 2025. Goldman Sachs traders warned that US stocks face more systematic selling from CTAs if the S&P 500 falls below 6,707. US Treasury yields rose following reports that Chinese regulators advised banks to limit exposure to US government bonds to diversify market risk.
Treasury Secretary Scott Bessent reaffirmed a "strong dollar policy" and dismissed rumors of intervention to support the Yen. GS notes that foreign inflows into the USD have slowed markedly despite firm cross-border FX flows. MUFG analysts believe the nomination of Kevin Warsh as Fed Chair has eased concerns over the Fed's independence, viewing him as a credible candidate. Nomura expects US retail sales to have risen 0.7% m-o-m in December, with strength being broad-based. GS macro models suggest that while US equity valuations are historically high, strong growth and lower inflation should continue to offer upside. Hedge funds increased shorting of single stocks at the fastest pace since 2020 during the recent equity rally.
BofA’s Bull & Bear Indicator reached an extreme "sell" signal of 9.6. Saxo analysts observed that US Treasury yields fell sharply late last week on weaker job openings but rebounded as equities stabilized. GS FX strategy expects USD/JPY to move through 160 as markets digest the Japanese election results, though intervention remains a key risk. Nomura notes that the Fed's preferred wage measure, the Employment Cost Index, likely remained sideways at 0.8% q-o-q, suggesting disinflation has leveled off. GS strategy suggests that US technology stocks have scope to rally further due to AI-driven revenue growth expectations.
Carlyle’s Jeff Currie argued that the US economy is headed for an upward cycle and that commodity markets are underinvested. MUFG maintains that while the USD has rebounded, additional Fed rate cuts later this year could contribute to renewed weakness. GS flows show Macro Hedge Funds were firm sellers of USD against the Yen. Saxo concludes that FX remains a clean expression of relative policy outlooks
G10
The Japanese Yen experienced significant volatility following a landslide victory for the ruling LDP under Prime Minister Sanae Takaichi, who secured a two-thirds supermajority. The USD/JPY initially rose to 157.76 but reversed to a low of 156.22 as intervention fears and a generally weaker USD took hold. GS economists believe this mandate increases the likelihood of a consumption tax cut on food, though the main impulse to domestic spending may not arrive until FY2027. MUFG expects the Bank of Japan to potentially hike rates in April, with fiscal sustainability remaining a key focus. Japan's top currency official warned that authorities are monitoring the market with "a high sense of urgency," damping further Yen selling. Nomura reported that overseas investors made the largest net purchase of Japanese long-term debt since July 2022. Macquarie analysts view "Senaenomics" as a potential supply-side revolution focused on innovation-driven productivity gains.
British Pound weakness intensified as the Bank of England delivered a dovish hold, with the EUR/GBP rising above 0.8700. GS FX options trading likes EUR/GBP higher as the political risk premium in the UK builds following the resignation of the Prime Minister's chief of staff. MUFG maintained long EUR/JPY and long AUD/GBP trade ideas. Euro net longs increased by 24% to 163,361 contracts, the largest since August 2023. Australian Dollar net longs also reached their highest level since December 2024, supported by an RBA hike. Canadian Dollar longs are at their largest since August 2023.
Saxo notes that JGB yields rose on fiscal concerns, with the 10-year yield hitting 2.29%. GS Japan economics continues to expect the next rate hike in July, though it could be brought forward if Yen weakness persists. Nomura believes Takaichi's influence may lead the BOJ to guide the terminal rate lower than markets expect. Macquarie projects USD/JPY to reach 145-146 at year-end if growth revitalization succeeds. MUFG noted that AUD/JPY briefly reached its highest level since 1990 above 110. GS analysts noted that the Yen has worked poorly as a hedge for US equities recently compared to the CHF and EUR. Nomura indicated that Japanese life insurers remain inactive in foreign bond investment while increasing FX hedge ratios. GS suggests that Japanese equities rallied on election results, but futures are flat, suggesting the outcome was largely priced in
Asian Currencies
The Thai Baht outperformed following a better-than-expected election result for the Bhumjaithai Party, which MUFG analysts believe signals relative political stability. GS analysts identified several potential coalition scenarios in Thailand, noting that no single party secured a majority.
USD/CNH broke below the 6.92 level amid broad USD weakness and strong risk sentiment outside the US. Chinese regulators reportedly urged banks to limit purchases of US Treasuries and pare down high-exposure positions to manage market risk. GS market strategists continue to expect USD/CNY to grind toward the 6.8 area around the planned April Xi-Trump meeting. Chinese banks have been diversifying into other G10 fixed income like EUR and AUD since late 2024. JPM strategists noted that Chinese inventory builds in copper are picking up pace ahead of the Lunar New Year.
Nomura maintain an above-consensus 2026 GDP growth forecast of 4.7% for Taiwan, corroborate by upbeat views on the AI theme. Taiwan's trade surplus narrowed slightly in January as import growth soared to 63.6% y-o-y. Macquarie economists emphasized that China is committed to meeting its GDP growth target. Korean exports suggest a much stronger US ISM in the coming months. JPM reported that CBOT soybean futures rose as China considers increasing US soybean purchases to 20 million tonnes.
Nomura expects the Central Bank of the Republic of China (Taiwan) to stay on an extended hold through end-2026. GS analysts observed that incremental foreign investments by Chinese banks into non-USD assets could help DXY weakness. MUFG noted that Yen strength had a positive spillover impact on sensitive regional currencies, including KRW, SGD, and THB. Nomura highlighted that January-February trade data in Taiwan is volatile due to Lunar New Year effects.
JPM noted that EUA prices declined 3.6%, driven by a decrease in net long positions by investment funds. GS flows show Korea continues to see the strongest net inflows among emerging markets. Nomura views the deterioration in Japan's travel balance with China as likely temporary. Macquarie noted that base metal future prices lost momentum in China amid a broad pullback. Nomura believes the CBC can remain patient as the gap between exports and domestic demand weighs on inflation.
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