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

I. Foundation 

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

EUR/USD as the core pair for shorting the dollar

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

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

The market’s real main theme is not simply shorting the dollar, but choosing the right currency to go long..Within the same narrative, assets following the same trading path can still have different risk-reward profiles, Choosing which horse to back is sometimes more important than correctly judging the direction.(See Notes 250522 on capital management in an exceptionally uncertain environment.)

Chart: Notes250516 Continuing the discussion of those unhedged dollar exposures & including an EUR/USD price target

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:

Chart: Our level to watch 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 becomes even more obvious:

Chart: 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 is seeing momentum build for fiscal burden-sharing, as the ECB and other institutions continue to promote the euro as an alternative to the dollar

3) As concerns and resentment over hostile U.S. policies intensify, European pension funds are increasing their dollar hedges

4）Large-scale defense spending is on the way and is a potential structural tailwind for the euro

5) After years of underperformance, euro-area equities (euro assets) are starting to outperform U.S. equities (dollar assets).

Since this is a Foundation column, let’s discuss each point one by one:

Behind the first point is a bet on the divergence in interest-rate cycles resulting from the divergence in monetary policy between the euro area and the United States.The Fed is clearly behind in its rate moves (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 more slowly than other central banks around the world, represented by the ECB, This process of monetary policy shifting from divergence to convergence is a process of dollar weakness, and we will position ourselves in advance.

The second and fourth points—spending and fiscal policy—are closely tied to debt. The market is playing a beauty contest, and the relatively more severe U.S. debt problem will be a significant fiscal drag, Any issue surrounding a budget agreement ultimately boils down to a trade-off between short-term fiscal stimulus and medium- to long-term deficits and the resulting pressure on the interest-rate structure(See Notes 250611: Revisiting fiscal stimulus: the key danger level for the ten-year U.S. Treasury yield.)

Chart: Notes 250430 Revisiting that huge rectangle lasting 4700 days 25 years ago

Notes 250429 also provides relevant context in its thorough answer to “what is truly a safe-haven asset?” If you haven’t read it, be sure to review it:

One more point: this Notes 250430 piece revisiting that huge rectangle lasting 4700 days 25 years ago is essential reading. It is our core explanatory article on the second half of the two key theses, “long gold, short dollar.”

The third and fifth points are fundamentally about asset allocation by sovereign (wealth) institutions and if you ask whether this thesis is already underway, it is clear that we are indeed in 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 share of dollar exposure hedged by pension funds remains extremely low. In other words, pension funds and insurers are still heavily weighted toward the dollar, and that position is continuing to suffer losses...

This data is consistent with our long-held view: as the short-term interest-rate differential between the U.S. and overseas markets widened and dollar strength persisted, FX hedging costs stayed high, leading most investors to leave their FX exposure to U.S. assets unhedged.

For most wealth-management 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, looking ahead, the hedging cost for USDCHF or USDJPY over the next 12 months 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 funds will have “no choice”:

“Generally speaking, the dollar is usually negatively correlated with risk assets: if stocks plunge or credit suffers a blowup, the dollar usually rises and helps protect the portfolio. And if stocks rise and the dollar rises too, that naturally forms a positive-drift-type hedge. This means institutions usually do not need to fully hedge their dollar exposure, and in practice, that is exactly what they do—

This arrangement works very comfortably when the dollar and U.S. equities confirm one another (that is, when the U.S. 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 will create a negative trading logic for the dollar as a whole, Institutions that have not sufficiently 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...”

— Notes 250430 revisiting that huge rectangle lasting 4700 days 25 years ago

Finally, one key question remains; having raised it at the outset, we should naturally bring it to a clear conclusion...

When will this “no choice” moment arrive?

At present, three conditions will be the key factors that ultimately trigger it(We also laid out three key triggers for selling U.S. equities in Notes 250507, The Moment to Short U.S. Stocks; if you haven’t read it, be sure to do so), and these the point when all three conditions are met will also be when the dollar-selling trade truly begins to gain momentum...

...

Let’s leave some suspense; I’ll finish the story tomorrow.

...

One final chart, Many friends have recently joined the community. The best way to get the most value from it is to make sure you read the historical Notes first (at least those from this year). Our thinking and actions form a coherent system, and some core ideas run through it all...

If everything is “normal,” then “abnormality” cannot appear; and if “abnormality” appears, then things are 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, not a directional trade (distinguishing decision-making perspectives)

The next key event influencing the direction of risk-on trades is the outcome of the U.S.-China talks currently taking place in London... It is worth pointing out that The Beta of trade-war headlines has fallen significantly. The market largely no longer believes in supposed deals or threats, or that today’s tariff levels will still be in place next month. This is highly consistent with the negotiating path we previously described:

Chart: Notes 250509 Before the trade negotiations

The brutal reality is that trade negotiations usually involve a long and repetitive tug-of-war, and the market does not have the patience to play along for the entire process.Therefore, whether the news concerns a ceasefire, a pause, renewed back-and-forth, or a policy reversal, it is now seen as temporary and liable to change at any moment, and the market reaction is no longer as intense as it was in recent 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 to near its highs and Treasury volatility has eased, it is no surprise that the U.S. feels confident enough to take a relatively firm stance(In a highly market-oriented system, market outcomes are a key reference point for U.S. decision-making.)。

2) The May data are crucial because they reflect outcomes amid intense tariff uncertainty. China’s exports in May continued to show exceptional resilience, still growing year over year by 4.8% despite last year’s high base, This means there is no urgent pressure to reach a deal with the United States or stimulate the economy, Compared with a major directional deal, the likelihood of reaching a limited, transactional agreement has risen, and decision-makers can indeed make only cautious concessions.

Chart: Although exports to the U.S. fell further and sharply, exports to other countries grew, so total exports still increased

Chart: Strong trade with non-U.S. markets explains U.S. demand

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

We also share the reasoning behind this analysis in this article. Over the decades since reform and opening-up began, in fact, a top-down decision-making system that sets the broad agenda has substantially determined the action framework of the entire decision-making apparatus, Whether in fiscal policy, the central bank, or trade, the fundamental constraint on all actions is the operating framework set by the growth target.

Last year, we bet on the “no choice” response to missing the target, and in the end the result was fairly good. This year, the same framework will also constrain what they cannot do. Meeting the target matters most; neither too much nor too little is best, as friends working within the system should understand. Exceeding the target is not necessarily a good thing. Whoever took the action would stand out, and if something went wrong, accountability would be pursued to the end.

This also means that we have no expectations for an adjustment before the third quarter, whether at the 7 meeting or in the market’s bets,

Let me make this clear once again here.

Finally, returning to the title, a technical concession is far more likely to be the outcome than a directional deal— for example, making a simple, symbolic concession on rare-earth exports (China controls about 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 easing controls (concessions on chip controls; advanced technology is another aspect) or tariff relief (the U.S. side may concede on fentanyl tariffs)..

Other outcomes are unlikely.

2025.06.09

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

The weekend Wrap added silver to the watchlist alongside gold and platinum; here are a few brief additions.

1/ White precious metals differ greatly from traditional traded commodities such as gold, oil, and copper;

2/ For commodities such as silver and platinum, once they break free of their long-term trading ranges (which they have not done yet), these metals can be especially volatile. On the one hand, this means their price potential should not be underestimated; on the other, trading them requires more patience than other categories(We waited 3 weeks in the community for the platinum 1100 breakout point);

3/ In terms of risk control, It is more appropriate to use smaller position sizes, because the stop-loss distances required by large price swings are far greater than in normal commodity trading.

4/ White precious metals are also the category best suited to trading through proxies in other markets, Compared with oil and gold, whose prices are constrained by fundamentals, the high volatility and speculative drivers of these metals mean their prices are more broadly reflected in other markets (gold and gold-mining stocks do not always perform in tandem and sometimes even follow opposite price paths, whereas white precious metals show a much stronger consistency in this respect)

5/ After two quiet months, the Wrap has brought up the possibility of re-entering gold, which has excited some people. But there is no need to rush At present, the point at which silver and platinum, whose trading fluctuations follow gold, complete a full trading cycle (like gold: rally, peak, correction) may be the point when gold trading restarts At that point, a breakout will have a greater chance of holding successfully and beginning the next move higher.

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

2025.06.10

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

Rising interest rates driven by deficits constrain the effectiveness of stimulus policies. Any issue surrounding a budget agreement ultimately boils down to a trade-off between short-term fiscal stimulus and medium- to long-term deficits and the resulting pressure on the interest-rate structure.

Generally, large-scale fiscal stimulus (under unified government) tends to be implemented in the early stages of economic expansion, when stimulus makes it easier for the economy to grow. Only a few stimulus measures have been 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, in order to analyze the multiplier effect that spending will have on the economy and the extent to which this change in fiscal policy will have a crowding-in effect on private-sector borrowing and spending.

From this perspective, The fiscal policy beginning 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 tightening, partly offsetting the direct stimulus.

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

On the other hand, the government's spending plans at this point come as bond supply and demand conditions are deteriorating, compared with periods when the economy was weaker, At the current stage of the cycle, an expanding deficit is itself more likely to push yields higher, and rising yields will partly offset the 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 damage to risk assets?

If the so-called One Big Beautiful Bill passes before Congress's summer recess, it would likely prompt previously hesitant investors to add to risk assets without necessarily choosing to do so, and that behavior would depend on long-end yields do not surge sharply.If passage of the bill instead triggers a return of interest rates to the “danger zone,” the result would naturally be unfavorable for risk assets.

The key indicator we are watching is the yield on 10-year U.S. Treasuries, with the key threshold for the danger zone provisionally set at 4.7%,In other words, yields still have about 25 basis points to go before reaching the level at which they begin to put broad pressure on asset classes.

Chart: Key danger level for ten-year U.S. Treasuries

Chart: Add 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 herein is for informational purposes 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.