USD
The US Dollar is experiencing a significant shift in market dynamics as analysts observe a breakdown in traditional economic correlations. According to an ex-Goldman Sachs strategist, a decade-long trend of the USD rising on better-than-expected monthly payrolls is coming to an end. This marks a structural "regime change" where traders are now actively selling the greenback despite strong US job market data. The core driver behind this shift is the market's overarching expectation that the Federal Reserve will aggressively cut interest rates. Even after the January jobs report showed an impressive 130,000 jobs added and unemployment falling to 4.3%, the USD ended the trading session lower, capping four straight days of losses. The market is interpreting that if the Fed adopts policies to cap long-term nominal yields, strong economic data will simply lower real yields, thereby reducing the attractiveness of American assets.
Furthermore, JPMorgan highlights that foreign investors are increasingly hedging against currency risk on their dollar-denominated holdings, adding substantial downward pressure on the USD. Investors holding large US equity portfolios are actively trading in currencies that are making new highs against the dollar to protect against further weakness. On the macroeconomic front, Nomura has lowered its Q4 GDP tracking estimate for the US to 2.8% from 3.4% previously. This downward revision was largely driven by a sharply widening US trade deficit, which ballooned to $70.3 billion in December. Imports of goods and services rose strongly by 3.6% month-over-month, particularly driven by a 5.5% surge in capital goods imports, while exports declined by 1.7%. Despite this, Nomura notes that real final sales to private domestic purchasers—a proxy for domestic aggregate demand—was actually revised up slightly, suggesting underlying consumption remains stable despite the external trade drag.
Key Themes:
A major correlation switch is currently dominating the US Dollar narrative, characterized by a decoupling of US economic growth from currency strength. There is an undercurrent of skepticism in the market toward the current administration's trade policies, which are viewed as erratic and volatile, thereby lessening the appeal of holding US assets. The persistent political pressure on the Federal Reserve to lower interest rates is keeping the market inherently biased toward a weaker dollar over the long term. Consequently, strong domestic data is ironically triggering a sell-off in the greenback as traders anticipate yield compression. Concurrently, the activation of massive foreign exchange hedging flows by international equity investors is compounding the bearish momentum, creating a self-fulfilling cycle of dollar depreciation despite an objectively robust domestic economy.
USD: An ex-Goldman Sachs strategist identifies a "regime change" where the market sells the dollar on strong payrolls due to expectations of Fed rate cuts capping nominal yields.
USD: JPMorgan notes that the activation of FX hedging flows by foreign investors is a primary reason to maintain a bearish stance on the dollar.
USD: The unpredictability of US trade policies and repeated political attacks on the Federal Reserve are motivating a structural shift away from US asset preference.
USD: The two-year Treasury yield surged by nearly 10 basis points following the jobs report, yet the dollar index fell, highlighting the broken correlation between yields and the currency.
USD: Momentum strategies and commercial hedging operations are leaning heavily into buying protection for a further decline in the dollar.
Supply/Demand Fundamentals:
USD: The US labor market demonstrated resilience with 130,000 jobs added in January and an unemployment rate of 4.3%.
USD: The US trade deficit widened substantially to $70.3 billion in December, dragging down aggregate economic growth metrics.
USD: Nomura lowered its Q4 US GDP tracking estimate by six-tenths of a percent to 2.8%, heavily influenced by the trade balance and flat inventory data.
USD: Imports of capital goods rose sharply by 5.5% month-over-month in December, reflecting strong domestic business investment.
USD: Initial jobless claims fell to 206k for the week ending February 14, pointing to a stabilization in employment after weather-driven noise in January.
G10 Currencies
The G10 currency complex is currently navigating a volatile mix of severe geopolitical tensions and diverging central bank monetary policies. The geopolitical risk premium has surged as the US military buildup near Iran has lifted Brent crude prices above $70 per barrel. According to Saxo, this reflects a market pricing in the risk of a prolonged conflict and a potential disruption to the Strait of Hormuz, rather than just a one-off shock. In the currency space, GS notes that the US Dollar's momentum has directly impacted major pairs, with EUR/USD continuing to make lower highs and facing significant resistance at 1.1830 and 1.1870. Meanwhile, USD/JPY easily breached the Non-Farm Payrolls highs around 154.70, with GS observing that US names are better buyers and natural stops have moved further away to the 156.14 level.
However, the Japanese Yen is facing dual pressures. JPMorgan remains broadly bearish on the JPY given its unsupportive policy mix and the broader global monetary environment. The Japanese currency was trading 1% lower against the dollar at 154.87 amidst heavy speculation of currency intervention, after minutes indicated the New York Fed checked exchange rates on behalf of the US Treasury. In contrast, commodity-linked G10 currencies are finding pockets of strength despite the overarching risk-off sentiment. JPMorgan sees currencies like the AUD and NZD gaining against the dollar, driven by the prospect of interest rate hikes by the Reserve Bank of Australia. The Aussie dollar has emerged as one of the best performers in the G10 this year, brushing off broader market jitters to trade near multi-year highs. If the Middle East situation escalates, GS expects risk-sensitive pairs like AUD/USD and EUR/USD to move lower, while suggesting that buying CHF/JPY could work as a defensive haven play.
Key Themes:
Geopolitical tensions in the Middle East have forcibly reintroduced a massive risk premium into global markets, fundamentally altering the trading dynamics of G10 currencies. The potential for a sustained disruption in oil flows is heavily weighing on the currencies of major energy importers like Japan and Europe, while simultaneously complicating the inflation outlook for central banks. Amidst this turmoil, there is a stark divergence in monetary policy expectations; while the US faces pressure to cut rates, the RBA is actively contemplating hikes, creating extreme dispersion in currency performance. Furthermore, the persistent weakness of the Japanese Yen has elevated intervention risks to a critical level, keeping traders on edge regarding sudden, policy-driven volatility spikes in the Asian session.
Key Market Drivers:
EUR: GS points out that EUR/USD is struggling with downward momentum, establishing lower highs with key technical resistance levels forming at 1.1830 and 1.1870.
JPY: Speculators pushed USD/JPY past the 154.70 mark, driven by US buying pressure, with the next major technical stop resting at 156.14 (GS).
AUD: The Australian Dollar is outperforming its peers, driven by significant portfolio rotations out of US equities and the hawkish stance of the Reserve Bank of Australia (JPMorgan).
CHF: As a safe-haven response to the rising military tensions in the Middle East, GS notes that the Swiss Franc is catching defensive bids, making CHF/JPY an attractive cross.
JPY: Intervention fears are acting as a psychological driver after reports surfaced that US and Japanese authorities were actively monitoring the exchange rate around the 154.87 level.
Supply/Demand Fundamentals:
EUR: European monetary policy remains static, with GS traders dismissing rumors of an early departure for ECB President Lagarde, limiting immediate fundamental catalysts for the Euro.
JPY: The Yen's structural weakness is anchored by an unsupportive domestic policy mix that continues to contrast sharply with global yields (JPMorgan).
AUD: Strong domestic inflation and resilient economic conditions have kept interest rate hikes firmly on the table for the RBA, boosting fundamental demand for the Aussie.
GBP: Weak economic data in the UK has essentially removed the possibility of a March rate cut, flattening the yield curve at the front end (GS).
G10: The reliance of European and Asian economies on energy imports makes their respective currencies highly vulnerable to the fundamental supply shock of a closed Strait of Hormuz.
Asia Currencies
Asian currencies are grappling with shifting global trade dynamics, local central bank easing cycles, and the looming threat of an oil price shock. A major focal point is China, where the International Monetary Fund (IMF) has severely criticized Beijing's economic policies for causing domestic waste and international damage. The IMF estimates that the CNY (Renminbi) is undervalued by approximately 16%, contributing to a massive current-account surplus that hit 3.7% of GDP last year. This reliance on net exports is triggering overcapacity concerns and threatening to spark retaliatory trade actions from global partners. The IMF is strongly urging a structural pivot toward a consumption-led growth model. In Southeast Asia, central banks are actively adjusting policy. MUFG reports that the Philippine central bank (BSP) cut rates by 25 basis points, while Bank Indonesia (BI) remained on hold. Both banks are considered dovish, with MUFG forecasting another cut from the BSP and two more from BI in the near future.
However, these easing cycles face significant domestic constraints. For the Philippines, higher domestic rice prices have forced the BSP to raise its inflation forecasts to 3.6% for 2026. For Indonesia, the weakness of the IDR (Rupiah) remains the primary barrier to immediate rate cuts. Further complicating the Asian FX landscape is the spike in Brent crude prices. MUFG notes that currencies like the PHP, INR, KRW, and THB are structurally sensitive to rising oil prices. In India, the INR is facing localized pressures following a massive widening of the January trade deficit to $34.7 billion, driven by a staggering 349% surge in gold imports. Despite this fundamental drag, Commerzbank expects the USD/INR pair to remain range-bound as portfolio outflows slow down on the back of improved market sentiment from a recently announced US-India trade deal.
Key Themes:
The macroeconomic narrative in Asia is dominated by China's immense export capacity and the resulting friction it creates within the global economy. The structural undervaluation of the Chinese Yuan continues to export deflationary pressures, prompting warnings from international bodies regarding severe external imbalances. Meanwhile, Southeast Asian economies are attempting to manage a delicate balancing act; they need to cut interest rates to stimulate sluggish domestic growth but are simultaneously constrained by imported inflation from rising food and energy costs. The escalating conflict in the Middle East poses a disproportionate risk to Asian FX, given the region's heavy reliance on imported crude oil, which threatens to widen trade deficits and force further currency depreciation across emerging markets.
Key Market Drivers:
CNY: The IMF's assessment that the Renminbi is up to 16% undervalued is a major driver of global trade tensions and potential tariff retaliations against China.
PHP: The BSP's decision to cut rates by 25bps, despite raising inflation forecasts, indicates a prioritized focus on stimulating economic growth, which will likely push USD/PHP higher (MUFG).
IDR: Weakness in the Indonesian Rupiah is actively preventing Bank Indonesia from initiating its desired rate-cutting cycle, keeping the currency highly sensitive to external shocks.
INR: The USD/INR exchange rate is being anchored between 90.00 and 91.00 as the negative impact of a massive trade deficit is offset by positive sentiment from a new US-India trade pact.
KRW & TWD: According to GS, these currencies remain resilient during global risk drawdowns due to their heavy exposure to hardware and semiconductor exports rather than volatile software tech.
Supply/Demand Fundamentals:
CNY: China's current account surplus reached an estimated 3.7% of GDP, driven by a record $1.2 trillion excess of exported goods over imports.
CNY: Government debt in China is soaring, estimated to hit almost 127% of GDP in 2025, limiting the fiscal capacity to stimulate domestic demand.
PHP: Supply-side factors, specifically changes in rice import policies, have fundamentally altered the inflation trajectory in the Philippines.
INR: India's January trade deficit ballooned to $34.7 billion, drastically overshooting consensus estimates of $25.4 billion due to an unprecedented surge in physical gold demand.
Asian FX: A prolonged disruption in the Strait of Hormuz would fundamentally alter the balance of trade for the region, as over 80% of Middle Eastern crude flows are destined for Asian markets.
Currency Forecasts
USD: An ex-Goldman Sachs strategist forecasts a weak US dollar for the entirety of 2026, citing a regime change in how the currency reacts to economic data.
AUD: JPMorgan lifted its forecast for the Australian dollar to $0.73 for the second quarter of 2026, driven by RBA policy expectations.
NZD: JPMorgan moved up its forecast for the New Zealand currency to $0.63 for the coming quarters.
EUR: JPMorgan maintains its forecast for the Euro at $1.20, while explicitly noting upside risks to this valuation.
JPY: JPMorgan expects the Japanese Yen to continue weakening, forecasting it to trade at 164 per US dollar by the fourth quarter of the year.
PHP: MUFG is biased to see USD/PHP climb gradually over time, citing negative output gaps and a downward trajectory for local interest rates.
INR: Commerzbank expects the USD/INR pair to remain tightly range-bound between 90.00 and 91.00 in the near term as trade dynamics stabilize.
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