1.0 USD
6.1.1 Synthesis
The US Dollar is navigating mixed signals as traders digest resilient labor data against a backdrop of geopolitical tension and shifting Fed expectations. J.P. Morgan and Nomura are analyzing the implications of the upcoming NFP report, with JPM forecasting a softer 30k jobs gain (vs 68k consensus) but maintaining a steady 4.4% unemployment rate. This data, combined with a 0.35% MoM core CPI forecast, keeps the Fed on a path of caution rather than aggressive easing. MUFG notes that the dollar index (DXY) has lost some momentum, falling below 97.00 after hitting recent highs, as weaker-than-expected retail sales (flat in Dec) fueled bets for a June rate cut. Geopolitically, the dollar remains supported by safe-haven flows amidst ongoing US-Iran tensions and supply chain disruptions. Goldman Sachs highlights that Chinese regulators' advice to limit US Treasury holdings was a fleeting market driver, but the underlying shift away from US debt remains a structural theme.
6.1.2 Key Themes
"Data Dependence 2.0" is the central theme; with the Fed on hold, every data point (NFP, CPI, Retail Sales) triggers significant repricing. The "Soft Landing" narrative is being tested by weak retail sales and low hiring, though GDP remains strong. "Geopolitical Risk" continues to underpin the dollar as a reserve asset, despite diversification talk. "Yield Sensitivity" is high; US 10-year yields falling to 4.15% on weak data directly impacted USD/JPY, pushing it below 155.
6.1.4 Bulleted Analysis
Key Market Drivers:
Labor Market: NFP expected to show modest growth (30k-45k), keeping unemployment steady at 4.4% (JPM/Nomura/GS).
Retail Sales: Flat December sales missed expectations, reviving recession fears and weighing on the dollar (MUFG).
Fed Outlook: Markets are fully pricing a June cut, with Nomura expecting no cuts under Powell and a resumption of easing in June under a new Chair.
China Holdings: Reports of China curbing US Treasury purchases caused a brief stir but fit a long-term diversification trend (Bloomberg).
Supply/Demand Fundamentals:
Treasury Supply: GS expects domestic buyers to absorb elevated US issuance in 2026 as foreign official demand wanes.
Commodity Hedging: J.P. Morgan notes a $69bn drop in commodity open interest, led by metals and energy, suggesting some profit-taking in the inflation trade.
2.0 G10 Currencies
6.1.1 Synthesis
The G10 space is defined by "Policy Divergence" and "Political Relief." The Japanese Yen has been volatile, initially strengthening on "Takaichi trade" unwinding before stabilizing as the LDP secured a supermajority. Goldman Sachs notes a narrative shift from "aggressive fiscal/weak JPY" to "buy Japan" as fiscal prudence rhetoric emerges. MUFG highlights that USD/JPY fell below 155 on falling US yields but remains sensitive to the new political landscape. The Euro and Sterling are trading mixed; the BoE delivered a hawkish surprise with a split vote, while the ECB remains firmly on hold. Nomura sees the ECB keeping rates at 2.00% through 2027, contrasting with the Fed's potential cuts. The Norwegian Krone (NOK) rallied after inflation surprised to the upside (3.4%), prompting Nomura to revise its rate cut forecast to just one in Dec 2026.
6.1.2 Key Themes
"Japan's New Era" is stabilizing the Yen; a supermajority government focusing on fiscal prudence rather than reckless spending is a positive structural shift (GS). "Inflation Stickiness" in Europe (Norway CPI beat) is challenging the dovish consensus, supporting currencies like NOK. "Tech Contagion" remains a factor; volatility in US tech stocks spills over into risk-sensitive G10 currencies (Saxo).
6.1.4 Bulleted Analysis
Key Market Drivers:
Japanese Yen (JPY): Stabilizing post-election; LDP supermajority viewed as supportive for governance, reducing fiscal risk premium (GS/MUFG).
Norwegian Krone (NOK): Strengthened on hot CPI (3.4%); Nomura sees Norges Bank on hold until late 2026.
Euro (EUR): Trading near 1.18; supported by a less dovish ECB outlook compared to the Fed (MUFG).
Singapore GDP: Q4 growth revised up to 6.9% y-o-y, beating estimates and supporting the SGD (Nomura).
Supply/Demand Fundamentals:
Crude Flows: Kazakh CPC blend is heading to South Korea, bypassing Europe, altering regional crude balances (Argus).
Gas Demand: European gas demand fell 8% due to warmer weather, softening energy prices and reducing the Euro's terms-of-trade drag (JPM).
3.0 Asia Currencies
6.1.1 Synthesis
Asian currencies are showing "Resilience" amidst global volatility. The Chinese Yuan (CNY) surged to its strongest level since May 2023, supported by reports of banks limiting US Treasury holdings and broad dollar weakness. Goldman Sachs remains bullish on the CNY, citing export resilience and undervaluation. The Singapore Dollar (SGD) is supported by a massive GDP beat (6.9% y-o-y), with Nomura maintaining an above-consensus 2026 forecast. The South Korean Won (KRW) is benefitting from the "buy Japan" spillover and tech sector stabilization. The Indian Rupee (INR) remains rangebound, with Nomura taking profits on 2-year payer positions, signaling a shift in rate expectations.
6.1.2 Key Themes"Growth Outperformance" is lifting Asian FX; Singapore's GDP surge highlights the region's economic vitality. "Policy Support" in China (credit easing) is putting a floor under the Yuan. "Rate Cycle Pivot" in SEA; Nomura is positioning for lower rates in Thailand, reflecting a divergence from the Fed's "high for longer" stance.
6.1.4 Bulleted Analysis
Key Market Drivers:
Chinese Yuan (CNY): Rallied to May 2023 highs; supported by repatriation flows and diversification away from USD assets (Bloomberg).
Singapore Dollar (SGD): Boosted by Q4 GDP reaching 6.9%, driven by manufacturing and trade (Nomura).
Indian Rupee (INR): Nomura takes profits on rate payers; lower oil prices and stable growth support the currency.
Thai Baht (THB): Nomura adds receiver positions, betting on lower yields as inflation remains contained.
Supply/Demand Fundamentals:
LNG Supply: China imported record volumes of Russian LNG in Dec, securing energy supply at competitive rates (OilPrice).
Tech Exports: Singapore's trade-related services are booming, partly due to US-China trade re-routing (Nomura).
4.0 Forecasts
Norges Bank (Nomura): Expects only one rate cut in December 2026 following the inflation beat.
US Payrolls (JPM): Forecasts 30k jobs added in Jan, below consensus, with unemployment steady at 4.4%.
Gold (GS): Sees structural "insurance" demand supporting prices, similar to central bank buying, despite short-term volatility.
Brent Crude (GS): Notes implied volatility skew is at its highest since June 2025, signaling market fear of upside price spikes due to Iran risks.
Singapore GDP (Nomura): Maintains forecast for 3.7% growth in 2026, well above consensus.
US Equities (Bloomberg): Warns of potential selling from algorithmic funds (CTAs) if the S&P 500 breaches short-term triggers.
Comments