From February twenty-four, two thousand twenty-five to February twenty-seven, two thousand twenty-five
I. Foundation
resistance to change and hence greater dependability for the results shown in the past.
The two trading rationales for USD/JPY
In 2017, the yen’s gain against the U.S. dollar was markedly weaker than that of other G10 currencies Although the U.S. dollar weakened overall, the euro rose more than 13% over the year, while the yen appreciated by only 3.7%, with most of its gains concentrated in the first quarter. By contrast, The dollar’s downward trend occurred mainly in the second and third quarters, but the yen’s appreciation during this period was relatively limited; the yen did not fully follow the dollar’s overall depreciation trend.
For most of 2017, the dollar-yen exchange rate remained strongly correlated with U.S. 10-year Treasury yields.From the U.S. election in 2016 through the end of 2017, the dollar-yen rate broadly moved with 10-year Treasury yields. This relationship began to break down after the Tax Cuts and Jobs Act (TCJA) was passed at the end of 2017.
In 18 2, U.S. Treasury yields rose while U.S. stocks fell sharply, and yen trading shifted from being driven by interest rates to being driven by safe-haven demand, As U.S. stocks corrected sharply (and global stocks also fell), the yen strengthened instead of weakening along with Treasury yields.The market’s trading rationale shifted at the beginning of 2018, with risk aversion becoming the dominant driver of the yen rather than interest rate differentials.
The market in 22, by contrast, was driven by interest rates. U.S. 10-year Treasury yields were also rising then, and U.S. stocks were falling; however, unlike in 2018, the yen did not strengthen along with stocks, but instead weakened as Treasury yields fell.
2025.02.26
Why the safe-haven rationale for the yen did not hold in 22
At the beginning of 22, the Russia-Ukraine conflict broke out and prices of energy and other raw materials surged.As a resource-poor country, Japan relies on imports for its main production materials and the sharp rise in commodity prices unsettled Japan’s environment of low inflation, low interest rates, and stable growth.
As import prices rose, Japan needed to exchange more yen for dollars to buy energy and basic raw materials, pushing up the dollar-yen exchange rate.At the same time, Imported inflation raised price pressures in Japan, further weakening the yen’s ability to preserve value.
2025.02.26
II. Insights
Our Viewpoints and ideas on market.
Expectations for China’s 2 PMI
China’s 2 manufacturing PMI and non-manufacturing PMI will be released on 3 1, This data release may show some noisy fluctuations and is relatively difficult to trade, but the data itself will most likely exceed expectations.
This upside surprise is mainly driven by workers returning after the Spring Festival holiday, which should help manufacturing output recover.Commodity prices in 2 clearly point to robust front-loaded demand in the U.S. market, which also implies a boost to Chinese export orders.
On the non-manufacturing PMI front, sustained growth in leisure and entertainment spending after the Spring Festival is expected to provide some support and help overall services maintain expansion. However, it is still too early to tell whether this will be sustained, especially against the backdrop of an uncertain global demand recovery.
Additional reading:Notes 250225: Asia’s Sluggish Consumption: A Growth Trajectory Below Expectations
2025.02.24
Pro-cyclical markets since the start of the year
Although markets broadly expected trade wars and policy uncertainty to exert tightening pressure on global financial conditions, 2market movements since 025 have unexpectedly been pro-cyclical. Global financial conditions have eased significantly, equity markets outside the United States have surged, and risk assets have rebounded broadly.
Chart: Market trading has essentially been pro-cyclical since 25
Not only have stocks performed strongly, but industrial metal prices have surged, credit spreads have narrowed to multiyear lows, and market volatility has generally declined although foreign exchange market volatility has remained relatively steady. In light of this trend, The dollar selloff since mid-1 is not a market anomaly but part of the current pro-cyclical market environment. The trade-war logic of 2018/2019 has now, it seems, run its course, and the market is deviating from the pattern expected at the time. But a final judgment must wait until a series of key tariff events play out over the next month and a half.
Chart: Some key upcoming events
2025.02.25
The logic behind the dollar sell-off: The second phase of trading is now underway
Looking back at the dollar’s trajectory since the fourth quarter of 2024, its logic can be divided into two phases.
The first phase was a classic tariff-premium trade: the trade-weighted U.S. dollar index (TWI) rose about 7% from its local low at the end of 9 in 2024, far outpacing the change in interest-rate differentials.Investors’expectations still followed the market logic of 2018/2019, under which the uncertainty premium from the trade war would support additional safe-haven demand for the dollar, beyond its fair value based solely on economic growth or interest-rate differentials.
The market is moving faster, but past experience still applies; this A similar high-volatility, expectations-driven trade-war trading phase to the one in the second half of 2018 now appears to have been fully priced in by the market between 2024 11 and mid-2025 1.
Dollar trading has been different since mid-January.The second phase began once the market believed the dollar had fully priced in the tariff premium. Investors began reassessing the macroeconomic spillover effects of tariffs and reached a new conclusion—In the short term, the trade war’s main impact on the United States is more likely to be higher inflation than slower economic growth.
This shift drove short-term inflation breakevens sharply higher, but because the Federal Reserve maintained its dovish stance, short-end nominal yields remained broadly unchanged. The yield on 2-year Treasuries even fell below its previous level after the high-inflation data were released in 1.This mismatch directly weakened the real-yield support for the dollar and drove its sell-off over the past month.In other words, real yields are driving the dollar lower.
Further reading: Notes250225 The procyclical market since the start of the year
At the start of the year, the market generally believed that U.S. “exceptionalism” was fully reflected in asset prices, while weakness in other global economies had not yet been fully priced in.The market The original thesis was that the dollar’s medium-term vulnerability could stem from the growth shock caused by the trade war, ultimately forcing the Fed to ease more than the OIS curve had priced in.However, since 2025, market attention has unexpectedly shifted to inflation driven by the trade war rather than an economic slowdown, a change at the macro level that caught the market by surprise.
Under the original expectation, the dollar would come under pressure if the Federal Reserve cut rates because the trade war slowed the economy. But now, although the Fed has not cut rates directly, it has lowered real interest rates by “benign neglect” of the surge in short-term inflation expectations.This means that, The Federal Reserve is effectively already implementing a form of monetary easing akin to that of 2019, just through a different channel, even though real interest rates are currently still in historically restrictive territory.
Looking ahead, the dollar is unlikely to rebound rapidly in the short term. Long-term inflation expectations (5Y5Y) remain anchored, and the Federal Reserve’s policy response is unlikely to change in response to shifts in short-term inflation data.Therefore, monetary policy may remain on hold over the next few months, which means the decline in the dollar’s real yields is unlikely to reverse in the short term。
However, as the surge in inflation breakevens gradually stabilizes, its downward pressure on the dollar may ease.In addition, bearish sentiment toward the dollar has strengthened, so it is still not appropriate to go against the trend and buy dollars.
The 3 meeting in FOMC will also be a key test for the dollar’s trajectory. The Federal Reserve may raise its inflation forecasts and revise its dot plot, particularly against the backdrop of a strong labor market over the past few months.If the dot plot indicates that the Federal Reserve is less tolerant of inflation, this could temporarily halt further dollar weakness.
Finally, although the market briefly overlooked tariffs, the overall trend is deteriorating.Over the past two weeks, the direction of the trade war has become more negative for global growth and market confidence. In addition to the announced fentanyl tariffs on Canada and Mexico, multiple sectoral and reciprocal tariff risks remain (such as steel, aluminum, semiconductors, pharmaceuticals, and automobiles). Tariffs on automobiles and pharmaceuticals in particular could weaken recent optimism in European markets and affect European asset prices.The market may be underestimating the impact of value-added tax (VAT) on reciprocal tariffs. If this policy is ultimately implemented, it could amount to a broad-based tariff of 15%-30% on several emerging-market countries, with a very wide reach.
Further reading: Notes250225 How far has the deleveraging of dollar longs progressed?
2025.02.25
Why did the dollar depreciate in 17?
The dollar fell in 2017, while 25 shares many similarities with that period, including the Trump administration’s trade policies, the policy-rate differential between the Federal Reserve and the European Central Bank, and expectations of fiscal expansion.Understanding why the dollar fell in 2017 can help analyze the possible path in 2025.
1/ First look at expectations and implementation; the latter matters more
After the U.S. election in 2016, the dollar strengthened in the short term, but it continued to fall throughout 2017, until 2018 3, when the United States only began to recover after officially raising import tariffs on steel and aluminum. Trade-policy uncertainty increased after the election in 2016, prompting capital to flow back to the United States and benefiting the dollar. However, because 2017 there was little actual policy action, market caution eased and the dollar fell.
In 2017, the Trump administration repeatedly emphasized trade reform, including renegotiating the North American Free Trade Agreement (NAFTA) and reassessing China’s membership in the World Trade Organization (WTO).However, tariffs were not actually raised that year, contrary to market expectations of an intense trade war, causing safe-haven demand for the dollar to decline. Foreign-exchange market volatility fell in the second quarter, while the dollar weakened overall.
2/ The second key factor to watch is U.S. equities
In the second quarter of 2017, global equities rebounded and investors turned their attention back to overseas assets, further reducing the dollar’s appeal.After the U.S. election in 2016, U.S. equities outperformed overseas markets, but in 2017, as trade tensions did not escalate as expected, overseas assets recovered and the dollar weakened.
3/ The U.S. exceptionalism narrative is supported by growth
In 2017, U.S. growth expectations remained stable, while growth expectations for China and Europe improved significantly. The unexpected upward revision to eurozone growth was supported mainly by household consumption, business investment, and fiscal stimulus. Meanwhile, the Chinese government ran its first-ever fiscal deficit in the first quarter of 2017, further boosting global growth expectations.
This trend changed capital flows toward non-U.S. markets. Improving global growth expectations prompted investors to increase their holdings of non-U.S. assets, reducing demand for the dollar.The situation was different in 2018: European growth expectations began to decline in the second quarter, which the European Central Bank attributed to factors including weak external demand, a harsh German winter, and strikes. In addition, global trade growth slowed in 2018-2019 (mainly due to tighter monetary policy and heightened trade tensions).
4/ The non-U.S. risk-premium trade is a process of gradual unwinding
At the start of 2017, the market was concerned about European political risks, especially the rise of parties skeptical of the European Union. At the time, less than a year had passed since the Brexit referendum, and far-right candidate Marine Le Pen had at one point led in the French presidential election polls. In addition, Germany’s Alternative for Germany was expected to enter the federal parliament, while the Dutch Party for Freedom might dominate the parliamentary election.
Subsequent actual results eased market concerns: the Dutch Party for Freedom came only second; Emmanuel Macron won the French presidential election, and his party later secured an absolute majority in the parliamentary election. Germany’s Alternative for Germany did enter parliament, but its performance was in line with expectations and did not heighten market concerns.The realization of these factors reduced the eurozone’s political risk premium, boosted the euro’s appeal, and weakened the dollar.
5/ Central banks and global currency differentials
The Federal Reserve raised rates three times in 17, while the European Central Bank kept rates at -0.4%. The dollar still did not strengthen as the interest-rate differential widened, mainly because of the shift in the ECB’s policy stance.
In 17 6, the European Central Bank revised its assessment of the economic outlook, judged growth risks to be broadly balanced, and removed language from its forward guidance about further rate cuts. Then, in 2017 10, the ECB announced a reduction in the scale of its asset purchases. These changes raised the eurozone shadow short rate by about 75 basis points, keeping the U.S.–Europe interest-rate differential stable and reducing the dollar’s relative appeal.
Meanwhile, expectations for the Trump administration’s fiscal policy stabilized in 17 4, and did not heat up again until the Tax Cuts and Jobs Act (TCJA) passed in 12. During this period, U.S. 10-year Treasury yields were broadly flat and failed to provide an effective boost to the dollar.
2025.02.26
III. Market Pulse
Our latest Comments on the economic and market environment
Weak Asian consumption: Growth momentum below expectations
In Asia, although the annual growth rate of household consumption and its share of GDP have returned to pre-pandemic levels, suggesting normalization on the surface, the recovery masks two key issues:Behind the recovery, two key issues are being masked:
1）Declining marginal propensity to consume:In most economies, the ratio of the increase in household consumption to the increase in GDP remains low, indicating a lack of momentum in consumption
2) Weak discretionary spending:Data such as retail sales indicate that consumer spending on nonessential goods remains weak and that consumers are behaving cautiously.
Take Thailand, for example, the improvement in consumption was magnified by the delayed post-pandemic recovery and weak growth in GDP other components (especially public consumption); the actual improvement came mainly from the government’s cash-transfer program implemented in the second half of 2024.But overall, weak consumption reflects structural changes in the post-pandemic economy, such as new jobs being concentrated more in low-wage industries, lower household savings, and rising food and public utilities costs squeezing disposable income.
Labor-market weakness has not become pervasive, but some key indicators have deteriorated. Among them, Slower wage growth is a common problem across all major economies, offsetting the boost to real disposable income from easing inflation.In Malaysia and Thailand, nominal wage growth fell to 1-2%, roughly in line with inflation, and real income growth nearly stalled. Although wage growth is relatively faster in the Philippines, it is showing signs of peaking. Quarterly financial data compiled by the Reserve Bank of India (RBI) show a marked slowdown in labor-cost growth. South Korea’s situation is the most severe: wage growth is slowing while unemployment is rising, and the labor market as a whole is weakening further.
Moreover, a rebound in wage growth in Asia is unlikely in the future.A decline in the ratio of job vacancies to unemployment indicates weak labor demand, Workers’ bargaining power is weakening. At the same time, uncertainty over U.S. tariff policy may continue to weigh on manufacturing companies’ hiring and expansion decisions, limiting wage growth.
Against this backdrop of constrained wage growth, households tend to increase savings to restore their financial balance, further curbing consumption demand. However, household savings remain below normal levels. Household saving rates in India, South Korea, and Thailand fell sharply in 2022-2023; household borrowing growth slowed in India and South Korea, while real household debt even declined in Thailand. Since the pandemic, the share of household savings in Indonesia has fallen, while the proportion of households with adequate savings has declined in the Philippines.As households rebuild their savings, consumption will remain constrained, further weighing on overall economic growth.
With household consumption weak, support from fiscal and monetary policy will also be relatively limited.
Fiscal-policy support for consumption mainly comes through tax adjustments, social spending, and cash transfers.Cash transfers can help stimulate household consumption in the short term. However, it is uncertain whether transfers will translate directly into consumption. Some households may prefer to save in response to strained household finances and future risks, so the actual boost to consumption will be below expectations.
Compared with fiscal policy, monetary policy has a more limited stimulative effect.In most economies, terminal real interest rates remain close to pre-pandemic levels, and in Indonesia and the Philippines they are still above those levels. This means monetary easing has limited stimulative power and is unlikely to boost consumption effectively.Malaysia’s terminal real interest rate has fallen more sharply, but this depends on whether the government can begin adjusting fuel subsidies in the middle of 2025. If subsidies are not adjusted, full-year inflation may be lower, thereby pushing up the real policy rate and weakening the effect of monetary easing.
Against a backdrop of rising global economic uncertainty, household consumption is expected to remain weak, constrained by slower wage growth, greater demand to rebuild savings, household deleveraging, and limited policy support. This also means that, Overall, in 2025 the three pillars of Asian economic growth—household consumption, exports, and investment—lack clear growth momentum, which could leave the region’s growth below potential.
2025.02.24
How far has the deleveraging of dollar longs progressed?
The market is currently going through a round of deleveraging in dollar-long positions, and how far this how far the process has progressed will determine whether the dollar continues to weaken or rebounds.
The extent of deleveraging can be assessed using several market indicators, including capital flows (DTCC options trading), market positioning (IMM positions in G10 FX), market sentiment (EM risk appetite), and dollar valuation models (TWI fair-value calculations);
Overall, Since the end of 2024 10, about 3/4 of dollar buying has been unwound, and this adjustment should limit further downside in the dollar.
Source: JPM
2025.02.25
Note: All content in this article 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 their decisions.