June ninth, two thousand twenty-five to June twelfth, two thousand twenty-five

I. Foundation 

resistance to change and hence greater dependability for the results shown in the past.

Use the euro to kill the dollar: on EUR/USD as the core pair for shorting the dollar

In today's market, EUR/USD stands out, as we have consistently emphasized since the beginning of the year:

EUR/USD is in fact the core pair for putting on a short-dollar position.

The market's The real central theme is not simply to short the dollar, but to choose the right currency to go long..Within the same narrative, assets following the same trading path can also have different risk-reward profiles, Choosing which horse to put in the race is sometimes more important than correctly judging the direction.(See also Notes250522 on managing capital in an environment of exceptional uncertainty)

Figure: Notes250516 Continuing the discussion of unhedged dollar exposure and including an EUR/USD target price

Since we exited at the top, EUR/USD has been moving sideways within a range,

until today, when it moved back above our level to watch:

Figure: Our observation level marks a key structural shift

In fact, if we put the year-to-date performance of the major currencies on one chart, the euro's outperformance would be even more evident:

Figure: The euro is the best-performing currency year to date

The fundamentals supporting the euro theme are very solid:

1) The ECB has clearly stated that it has ended its rate-cutting cycle

2) The euro area momentum toward fiscal burden-sharing is building The ECB and other institutions are increasingly promoting the euro as an alternative to the dollar

3) As concerns and aversion toward hostile U.S. policies intensify, European pension institutions are increasing their dollar hedge positions

4）Massive defense spending are coming, potentially providing structural support for the euro

5) After years of underperformance, Eurozone equities (euro assets) are beginning to outperform U.S. equities (dollar assets)

Since this is the Foundation section, let's discuss them one by one:

The first point is based on a bet that interest-rate cycles will become misaligned as eurozone and U.S. monetary policies diverge.The Fed is clearly lagging in its rate actions (see Notes250528 on the paradox of high deficits and high interest rates, where the Fed has been pushed to the very end of the decision-making chain), while the ECB has completed its rate cuts, the Fed, at the very end of the decision-making chain, will act significantly later than other central banks around the world, led by the ECB, This process of monetary policy moving from divergence to convergence is a process of dollar weakness, and we will position ourselves ahead of it.

Points two and four, spending and fiscal policy, are closely tied to debt; the market is playing a beauty contest, the relative severity of the U.S. debt problem will be a significant fiscal drag, Any issue concerning a budget agreement ultimately boils down to a contest between short-term fiscal stimulus and the pressure on the interest-rate structure caused by medium- to long-term deficits(See Notes250611 Reassessing fiscal stimulus: the key danger level for the ten-year U.S. Treasury yield).

Figure: Notes250430 Revisiting that massive rectangle that lasted 25 years and 4700 days

Notes250429 also contains relevant additions that thoroughly answer the question, “What is the safe-haven asset?” If you haven't read it, be sure to review it:

One more point: this Notes250430 revisiting that massive rectangle from 25 years ago, which lasted 4700 days, is essential reading. It is our core explanatory article on the second half of the two key rationales, “long gold, short dollar.”

The third and fifth points are fundamentally about the asset allocation of sovereign (wealth) institutions, and if you ask whether this logic has begun, it is clear that we are indeed at the start of an asset rotation cycle that could span 5-10 years, with the dollar serving as the pricing denominator for U.S. assets (and most global financial assets).

Taking this a step further, what does the data tell us about the progress of this narrative?

This Deutsche Bank chart makes the answer quite clear, The proportion of dollar exposure hedged by pension funds remains extremely low. In other words, pension funds and insurance companies are still heavily invested in dollars, and this position is currently continuing to incur losses...

These data are consistent with our long-standing view: the widening short-term interest-rate differential between the U.S. and other countries, together with the dollar's persistent strength, has kept FX hedging costs high and led most investors to leave their currency exposure to U.S. assets unhedged.

For most wealth institutions, FX hedging costs remain too high. Pension and insurance companies need to meet fixed return targets. Pension funds' typical annualized return target is 6.5%-7.0%. But for the coming 12 months, the hedging cost on USDCHF or USDJPY is as high as 3.5%-4.0%, a heavy negative carry that is enough to deter most asset managers.

What we are still betting on is that these pools of capital will have “no choice”:

“Generally speaking, the dollar is usually negatively correlated with risk assets: if stocks plunge and credit blows up, the dollar usually rises and protects the portfolio. And if stocks rise and the dollar rises too, that naturally constitutes a positive-drift hedge, which means institutions usually do not need to fully hedge their dollar exposure. In practice, that is exactly what they do—

This arrangement works very well when the dollar and U.S. stocks confirm each other (that is, when the United States is in TINA or US Exceptionalism), but if the end of TINA/US Exceptionalism is confirmed, they will have to start rebuilding the dollar hedges they should have held, and may even need to hold more..

It is precisely the start of this contrarian trade that creates a negative trading logic for the dollar as a whole, Institutions that have not adequately hedged their dollar risk will have to start selling dollars steadily. This is a genuine rotation: if others are selling, you have no choice but to follow...”

— Notes250430 Revisiting that massive rectangle from 25 years ago, which lasted 4700 days

Finally, one key question remains, and a clear conclusion should naturally follow from the opening...

When will this moment of “no choice” arrive?

At present, three conditions will be the core factors that ultimately trigger it(We also set out the three key triggers for selling U.S. equities in Notes250507 The Moment to Short U.S. Stocks; if you haven't read it, you should), and these The point when all three conditions are met will also be when the dollar-selling trade truly begins to expand...

...

Amid broad consensus around the narrative (Paul Tudor Jones is also calling for selling the dollar today), everyone knows the dollar should be sold, but there is no clear, actionable, falsifiable answer to “when to sell.” Identifying these three factors is what sets us apart from the market...

Let's leave some suspense and finish tomorrow.

...

Finally, one more chart, Many friends have recently joined the community. The best way to get the most value from it is to make sure to read the Notes archive first (at least those from the current year). Our thinking and actions form a consistent, integrated system, and certain core ideas run throughout...

If everything is “normal,” then “abnormal” events will not occur; if an “abnormal” event occurs, then things are already no longer “normal”...

Consistency is the only answer that holds throughout.

2025.06.12

II. Insights 

Our Viewpoints and ideas on market...

Focus on London: tactical concessions rather than a directional trade (distinguishing decision-making perspectives)

The next key event shaping the direction of risk-on trades is the outcome of the U.S.-China talks currently taking place in London... It should be noted that The beta of trade-war-related headlines has fallen significantly. The market largely no longer believes in supposed agreements or threats, or that today's tariff levels will necessarily remain in place next month. This is entirely consistent with the negotiating path we discussed earlier:

Figure: Notes250509 Before the trade negotiations

The harsh reality is that trade negotiations often involve a long and repeated tug-of-war, and the market does not have the patience to stay engaged throughout.Therefore, whether the news concerns a ceasefire, a pause, a reversal, or a policy U-turn, it is now viewed as temporary and liable to change at any time, and the market reaction is no longer as dramatic as it was over the past few months.

From the perspective of decision-makers in both East and West, this London meeting is also very different from the one a month ago...

1) Given that the S&P 500 index has returned close to its highs and volatility in U.S. Treasuries has eased, it is no surprise that the United States feels confident enough to adopt a relatively tough stance(In a highly market-oriented system, market outcomes are a key reference point for U.S. policymaking)。

2) The May data are crucial because they reflect results under intense tariff uncertainty. China's exports in May continued to show exceptional resilience, still achieving year-over-year growth of 4.8% despite last year's high base, This means there is no longer an urgent need to reach an agreement with the United States or stimulate the economy, Compared with a major deal that changes the direction, the likelihood of reaching a limited, transactional agreement has increased; decision-makers can indeed make only cautious concessions.

Figure: Although exports to the United States fell further and sharply, exports to other countries grew, so the total still increased

Figure: Strong trade with countries other than the United States offers a clear read on U.S. demand

Behind the strong exports, this means second-quarter GDP growth has been secured (actual second-quarter GDP growth will very likely exceed 5%, and the third quarter will also benefit from a low base). This is the fundamental source of confidence....

This article also shares our reasoning on this point. Over the decades since reform and opening up, in fact, a top-down decision-making system that sets priorities and brings the rest into line has materially determined the entire decision-making apparatus's framework for action, Whether fiscal, central banking, or trade-related, all actions are fundamentally constrained by the operating framework of the growth target.

Last year, we were betting on the “no choice” scenario if the target was missed, and in the end, the outcome was reasonably good. This year, the same framework will also constrain what they do not do. Meeting the target is paramount; neither exceeding nor falling short is best, and friends who work within the system should understand what we mean. Exceeding the target is not necessarily a good thing. If someone has stood out as the one who made the move, and something goes wrong, accountability will be pursued to the end.

This also means that we have no expectations for the 7 monthly meeting or for any adjustment before the third quarter that the market is betting on,

Let us make this clear once again here.

Finally, returning to the title, A tactical concession is much more likely to be the outcome than a directional deal, for example, a simple symbolic concession on rare-earth exports (China controls around 70% to 90% of the world's key rare-earth resources, giving it greater bargaining power, so rare-earth materials are one aspect), in exchange for eased controls (concessions on chip controls, with advanced technology as the other aspect) or tariff relief (the U.S. side may make concessions on fentanyl tariffs)..

Other outcomes are unlikely.

2025.06.09

A brief discussion of precious metals (gold and white precious metals)

This weekend's Wrap added silver as an asset to watch alongside gold and platinum; here are a few additional brief comments.

1/ White precious metals are very different from commodities in the traditional trading universe, such as gold, oil, and copper;

2/ For commodities such as silver and platinum, Once they break free of the constraints of their long-term trading ranges (which they have not yet done), these metals can be especially volatile. This means their price potential should not be underestimated, and trades in them require more patience than in other categories(We waited 3 weeks in the community for a breakout point in platinum1100);

3/ In terms of risk management, It is more appropriate to trade with a smaller position size, because the stop-loss distance associated with large swings is much wider than in normal commodity trading.

4/ White precious metals are also the category best suited to trading through proxies in other markets, Because, compared with oil and gold, whose prices are constrained by fundamentals, high volatility plus speculative drivers means their prices are reflected more broadly in other markets (gold and gold-mining stocks do not always perform alike and sometimes even follow opposite price paths, whereas this alignment is stronger for white precious metals)

5/ After two quiet months, Wrap has once again raised the question of re-entering gold, which has excited some people. But there is no need to rush, at present, the point when silver and platinum, which follow gold's trading fluctuations, complete a full trading cycle (like gold: rising, peaking, and correcting) may be when gold trading resumes, and a breakout at that point will have a greater probability of holding successfully and starting the next upward move.

Finally, a brief reminder: holding short-term gold positions during the CPI/PPI data week is very risky.

2025.06.10

Reassessing fiscal stimulus: the key danger level for the ten-year U.S. Treasury yield

The rise in interest rates caused by deficits will limit the effectiveness of stimulus policies. Any issue concerning a budget agreement ultimately boils down to a contest between short-term fiscal stimulus and the pressure on the interest-rate structure caused by medium- to long-term deficits.

Generally speaking, large-scale fiscal stimulus measures (under unified government) tend to be implemented in the early stages of an economic expansion, when stimulus makes it easier for the economy to grow. Only a few stimulus measures are implemented when unemployment is low and the cycle is weak (for example, in 2001).

Assessing a fiscal bill requires considering not only the amount of spending but also its purpose, so as to analyze the multiplier effect that the spending may have on the economy and the scale of the base effect that this change in fiscal policy may have on private-sector borrowing and spending.

From this perspective, The fiscal policy taking effect in the second half of the year will indeed provide moderate support for economic growth in the short term, but will ultimately lead to more restrictive policies, partly offsetting the direct stimulus.

Especially when this fiscal stimulus comes after the wealth effect has already occurred.

On the other hand, the government's spending plans are coming at a time when bond supply and demand conditions are deteriorating; compared with periods of weaker economic conditions, at the current stage of the cycle, expanding the deficit itself is more likely to push yields higher, and rising yields will partly offset fiscal stimulus.

At this point, a key question naturally arises, and it is also one of the core risks we will be watching over the coming months:

From what interest-rate level onward would rising yields cause material harm to risk assets?

If the so-called One Big Beautiful Bill passes before Congress's summer recess, it will likely prompt previously hesitant investors to add to risk assets involuntarily, and this behavior is contingent on long-term yields do not surge sharply.If the bill's passage instead triggers a return of interest rates to the “danger zone,” the result will naturally be unfavorable for risk assets.

The key indicator we are watching is the 10-year U.S. Treasury yield, with the key level at the lower end of its danger zone provisionally set at 4.7%,In other words, yields still have about 25 basis points of room before they reach a level that begins to place broad pressure on asset classes.

Figure: The key danger level for the ten-year U.S. Treasury yield

Figure: Adding a chart from the Morgan Stanley Global Macro Forum for reference; most of the value is on this page

2025.06.11

III. Market Pulse 

Our latest Comments on the economic and market environment

Note: All content in this text is for reference only, does not constitute investment advice, and is not a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for making decisions.