From February twenty-fourth, two thousand twenty-five to February twenty-seventh, two thousand twenty-five
I. Foundation
resistance to change and hence greater dependability for the results shown in the past.
Two trading logics for USD/JPY
In 2017, the Japanese yen’s gains against the U.S. dollar were clearly weaker than those of other G10 currencies Although the U.S. dollar weakened overall, the euro rose by 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 U.S. dollar’s downward trend occurred mainly in the second and third quarters, yet the yen’s appreciation during this period was limited; it did not fully follow the dollar’s overall depreciation trend.
For most of 2017, the dollar–yen exchange rate remained strongly correlated with the yield on U.S. 10-year Treasuries.From the U.S. election in 2016 through the end of 2017, the dollar–yen exchange rate largely moved in line with 10-year U.S. Treasury yields. This relationship began to break down after the Tax Cuts and Jobs Act (TCJA) 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 fell sharply (and global equity markets also pulled back), the yen strengthened rather than weakening in line with U.S. Treasury yields.The market’s trading logic 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 was instead driven by interest rates: U.S. 10-year Treasury yields were also rising as U.S. stocks declined. However, unlike in 2018, the yen did not strengthen alongside stocks; instead, it fell as U.S. Treasury yields declined.
2025.02.26
Why the yen’s safe-haven logic did not hold in 22
At the beginning of 22, the Russia–Ukraine conflict broke out and prices for energy and other raw materials surged.As a resource-poor country, Japan relies on imports for most of its key production materials, and the sharp rise in commodity prices unsettled Japan’s low-inflation, low-interest-rate, and stable-growth economic environment.
As import prices rose, Japan needed to exchange more yen for U.S. dollars to buy energy and basic raw materials, pushing up the dollar–yen exchange rate.At the same time, Imported inflation increased 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 in 2 PMI
China’s 2 manufacturing PMI and non-manufacturing PMI will be released on 3 1, These data will contain some noise and fluctuations, so they are relatively unlikely to be very tradable, although the data themselves will most likely exceed expectations.
This outperformance relative to expectations is mainly driven by workers returning after the Lunar New Year holiday, which should lead to some recovery in manufacturing output.Commodity prices in 2 clearly show strong front-loaded demand in the U.S. market, which also implies a boost to China’s export orders.
As for the non-manufacturing PMI, continued growth in leisure and entertainment spending after the Lunar New Year is expected to provide some support and help the services sector as a whole maintain its expansion. However, it is still too early to tell; the durability remains to be seen, especially as the recovery in global demand is still unstable.
For further reading:Notes 250225Sluggish Asian Consumption: Growth Trends Below Expectations
2025.02.24
The pro-cyclical market since the start of the year
Although markets broadly expect trade wars and policy uncertainty to tighten global financial conditions, 2Since 025, market movements have unexpectedly displayed pro-cyclical characteristics. Global financial conditions have eased significantly, equity markets outside the United States have risen strongly, and risk assets have rebounded broadly.
Chart: Market trading has essentially been pro-cyclical since 25
Equities have performed strongly, industrial metals prices have risen sharply, credit spreads have narrowed to multiyear lows, and market volatility has broadly declined, although foreign-exchange market volatility has remained relatively steady. Viewed in this context, 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 events are approaching
2025.02.25
The case for selling the dollar: the second trading phase is here
Looking back at the dollar’s trajectory since the fourth quarter of 2024, its drivers can be divided into two phases.
The first phase was a classic tariff-premium trade: the dollar trade-weighted index (TWI) rose about 7% from its local low at the end of 2024 9, far outpacing the change in interest-rate differentials.Investors’expectations still followed the market logic of 2018/2019, according to which the uncertainty premium created by 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 This phase, following the same playbook and resembling the high-volatility, expectations-driven trade-war trading of the second half of 2018, now appears to have been fully played out by the market between 2024-11 and mid-2025-1.
Dollar trading has been different since mid-January.Once the market viewed the dollar as having fully priced in the tariff premium, the second phase began. Investors started reassessing the macroeconomic spillover effects of tariffs and reached a new conclusion—In the short term, the trade war’s main effect on the United States is more likely to be higher inflation than slower economic growth.
This shift drove a sharp rise in short-term inflation breakevens. However, because the Federal Reserve remains committed to a dovish stance, short-end nominal yields have been broadly unchanged; the 2-year Treasury yield even fell below its previous level after the release of high inflation data in 1.This mismatch directly weakened the real-yield support for the dollar and prompted dollar selling over the past month.In other words, real yields are driving the dollar lower.
Further reading: Notes 250225 Pro-cyclical markets since the start of the year
At the start of the year, markets broadly believed that U.S. “exceptionalism” was fully reflected in asset prices, while weakness in the rest of the global economy had not yet been fully priced in.The market The original logic was that the dollar’s medium-term vulnerability might stem from a trade-war-induced growth shock, ultimately forcing the Federal Reserve to ease more than the OIS curve had priced in.However, since 2025, market attention has unexpectedly shifted toward inflation caused by the trade war rather than economic slowdown—a macro-level shift that caught the market off guard.
Under the original expectations, if the Federal Reserve cut rates because the trade war slowed growth, the dollar would come under pressure. Today, however, although the Federal Reserve has not cut rates directly, it has lowered real rates through “benign neglect” of the surge in short-term inflation expectations.This means that, The Federal Reserve is effectively implementing a degree of 2019-style monetary easing, just through a different channel, even though real interest rates remain in historically restrictive territory.
Looking ahead, the dollar is unlikely to rebound quickly 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 short-term inflation data.Therefore, monetary policy may remain on hold over the next few months, which means The downtrend in the dollar’s real yields is unlikely to reverse in the short term。
However, as the surge in inflation breakevens gradually stabilizes, its suppressive effect on the dollar may ease.Moreover, bearish sentiment toward the dollar has strengthened, so It is still not appropriate to go long the dollar against the prevailing trend.
The 3 meeting in FOMC will also be a key test for the dollar’s trajectory. The Federal Reserve may raise its inflation forecast and revise its dot plot, particularly against the backdrop of a strong labor market over the past few months.If the dot plot shows that the Federal Reserve is less tolerant of inflation, this could temporarily halt further dollar weakness.
Finally, although tariff concerns were briefly ignored by the market, the overall trend is worsening.Over the past two weeks, the direction of the trade war has had a more negative effect on global growth and market confidence. In addition to the announced fentanyl tariffs on Canada and Mexico, several sectoral and reciprocal tariff risks remain, including 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 effect of value-added tax (VAT) on reciprocal tariffs. If this policy is ultimately implemented, it could amount to a broad tariff of 15%-30% on several emerging-market countries, with a very wide impact.
Further reading: Notes 250225 How far has dollar-long deleveraging progressed?
2025.02.25
Why did the dollar depreciate in 17?
The dollar fell in 2017, and 25 has many similarities to that period, including the Trump administration’s trade policy, 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 / Look at expectations and what actually happens; the latter matters more
After the U.S. election in 2016, the dollar strengthened briefly, but It continued to fall throughout 2017, only beginning to recover after the United States formally raised import tariffs on steel and aluminum in 2018 3 It began to recover only after the formal increase in U.S. import tariffs on steel and aluminum.Trade-policy uncertainty rose after the 2016 election, prompting funds to flow back to the United States and benefiting the dollar. However, because actual policy action in 2017 was limited, Actual policy action was limited, market caution eased and the dollar fell back.
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, in contrast with the intense trade war the market had expected, reducing safe-haven demand for the dollar. Foreign-exchange market volatility declined in the second quarter, while the dollar weakened overall.
2 / Second, the key is to watch U.S. equities
In the second quarter of 2017, global equities recovered 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 failed to escalate as expected, overseas assets recovered and the dollar weakened.
3 / The U.S. exceptionalism narrative was supported by growth
In 2017, U.S. growth expectations remained stable, while expectations for China and Europe improved markedly. The upside surprise in euro-area growth was mainly supported by household consumption, corporate 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 redirected capital toward markets outside the United States. Improving global growth expectations encouraged investors to increase their holdings of non-U.S. assets, reducing demand for the dollar.2018 was different: European growth expectations began to fall in the second quarter, which the European Central Bank attributed to weak external demand, a harsh German winter, strikes, and other factors. In addition, global trade growth slowed in 2018-2019, mainly because of tighter monetary policy and escalating trade tensions.
4 / The non-U.S. risk-premium trade is a gradual unwinding process
At the start of 2017, markets were concerned about political risks in Europe—particularly 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 could have dominated the parliamentary election.
The actual results that followed eased market concerns: the Dutch Party for Freedom came in only second, Macron won the French presidential election, and his party subsequently secured an absolute majority in the parliamentary election. Although Alternative for Germany entered parliament, its performance was in line with expectations and did not heighten market concerns.The realization of these factors reduced the euro-area political risk premium, increased the euro’s appeal, and weakened the dollar.
5 / Central banks and global currency differentials
The Fed raised rates three times in 17, while the European Central Bank kept its rate at -0.4%. The dollar still did not strengthen as the rate differential widened, largely because of a shift in the ECB’s policy stance.
In 17 6, the ECB revised its assessment of the economic outlook, judging growth risks to be broadly balanced and removing language about further rate cuts from its forward guidance. Then, in 2017 10, the ECB announced a reduction in the scale of its asset purchases. These changes pushed the euro area short-term shadow rate (shadow short rate) up by about 75 basis points, This kept the U.S.–euro-area rate differential stable and weakened the dollar’s relative appeal.
Meanwhile, Expectations for the Trump administration’s fiscal policy stabilized in 17 4 and only heated up again after 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
The Federal Reserve QT and the impact of the debt ceiling on market liquidity
Continuing our discussion of the Federal Reserve’s January FOMC minutes. The minutes emphasized The impact of the debt-ceiling issue on liquidity and balance-sheet policy, with some suggesting pausing or slowing QT until the debt-ceiling issue is resolved, to ease potential liquidity pressures.
1 / The relationship between QT and market liquidity
The Federal Reserve gradually implements QT by reducing its holdings of Treasuries and other assets, and in this process, as the Federal Reserve’s balance sheet contracts, excess reserves in the banking system gradually decline and market liquidity falls. Therefore, continuing QT for an extended period could turn what was originally an “ample” level of reserves into a liquidity squeeze.
2 / The relationship between the debt ceiling and market liquidity
Before the debt-ceiling issue is resolved, the Treasury mainly spends funds from its TGA account, sending money into the banking system and increasing commercial bank reserves, which boosts short-term market liquidity.Because the Treasury issues fewer short-term bills, money market funds (MMFs) may allocate more cash to other short-term assets rather than Treasuries.
In the short term, this makes funding markets appear “awash with liquidity,” and bank reserves also seem ample. However, because this ample liquidity is not based on an injection of new funds, once the debt-ceiling issue is resolved, the Treasury will replenish the TGA account by accelerating Treasury issuance, liquidity will quickly recede, and bank reserves will fall accordingly.
3 / The combined effects of QT and the debt ceiling on market liquidity
Resolving the debt-ceiling issue will drain a substantial amount of funds, while continued QT will also remove bank reserves; together, the two will have a combined effect on market liquidity.The Federal Reserve Bank of New York also said that the debt-ceiling issue could make liquidity signals unclear. If QT continues, reserves could fall rapidly once the debt-ceiling issue is resolved, potentially even dropping below the level the Federal Reserve considers appropriate.
In 2019, the Federal Reserve faced funding-market stress during QT. Because reserves had fallen to extremely low levels, it had to reverse its QT policy and expand its balance sheet to ease the market liquidity crisis.
This can be seen in the chart below:At the time, after QT had continued for about 18 months, bank reserves fell to extremely low levels. In particular, relative to the size of the economy, they accounted for less than 7% of GDP:
Current reserve balances still exceed 3 trillion dollars, at about 11% of nominal GDP, so Although QT may continue, over the next few months reserve balances currently considered “abundant” will not yet fall to merely “ample” levels—that is, market liquidity will not yet be under strain, It is unlikely to trigger a liquidity crisis in the short term.
4 / Discussion of future QT policy
The minutes state:“Several participants noted that it might be appropriate to consider pausing or slowing the reduction of the balance sheet until this event is resolved.”
Further reading: Notes 250221 Federal Reserve January meeting minutes
John Velis said: If the Federal Reserve is truly concerned about funding-market stress caused by limited liquidity, it could pause QT in 3, or more likely pause in 5 while the debt-ceiling issue remains unresolved. But Once the debt-ceiling issue is resolved, restarting QT could be both complicated and unnecessary, especially considering that QT itself may end in late summer or early fall.
Meanwhile, TGA has fallen from 8420 hundred million dollars a week ago to 7380 hundred million dollars, and this decline is expected to continue. As of 2 12, the Treasury has less than 1000 hundred million dollars of capacity remaining under the extraordinary measures it began using on 1 21, meaning If the debt-ceiling issue remains unresolved, TGA will have to keep drawing down its existing balance to fund government spending.
The X-date (the date the debt ceiling is reached) remains highly uncertain and depends mainly on tax receipts in 4, but Most now expect it could be pushed to the end of 7, and this expectation is gradually being reflected in market pricing。
The current Treasury bill yield curve, with the section marked in orange showing a slight upward trend:
Investors are marginally avoiding Treasury bills maturing at the end of 7 and in 8.
5 / Bonds and interest rates
In the short term, uncertainty over QT could affect the bond market and push short-term bond yields lower.Over the medium to long term, driven by the debt-ceiling issue and excess supply resulting from fiscal policy, U.S. Treasury yields could still rise back to around 5%。
For now, yields at 4.5% or below are not within a reasonable range.The minutes also suggest that the supplementary leverage ratio (SLR) for global systemically important banks (GSIBs) may be discussed to ease the capital burden on large banks. This change could give banks more room to hold Treasuries and ease market pressure.
2025.02.27
Talking Treasuries: How low can UST-year Treasury yields go?
After the U.S. election, several factors drove Treasury yields higher, including a stalemate in the buy-side market, duration selling driven by momentum trading, reflation trades by macro funds, and the Federal Reserve’s hawkish stance. However, These factors partially reversed to varying degrees after the U.S. presidential inauguration in 2025.
1 / The buyer strike ended; 2 / momentum-driven selling turned into momentum-driven buying; 3 / growth-negative immigration measures and headlines about spending cuts through DOGE have led macro funds to question their reflation trades.For now, only the Federal Reserve’s stance remains relatively hawkish and has not fully shifted to dovish. One piece of evidence is that the market-implied trough in the Federal Reserve’s policy rate is higher than it was before the 12 FOMC meeting, driving the entire yield curve higher.
Further declines in UST yields mainly depend on the following:
1) Whether core PCE inflation continues to decline: MS economists expect core PCE inflation of 2.58% Y/Y, a new low, and to continue declining over the next few months, strengthening market expectations for rate cuts.
2) Market pricing of the Federal Reserve policy-rate floor:The 10-year Treasury yield is highly correlated with the market-implied trough in the Federal Reserve’s policy rate.If the market-implied floor for the Federal Reserve’s policy rate falls to 3.40% or further to 3.25%, the 10-year Treasury yield is expected to decline from 4.30% to 4.09% or fall below 4.00%, respectively.
If core PCE inflation data come in better and prompt a more dovish stance from FOMC, investors may increase duration exposure, pushing the market’s expected rate floor lower still.
3) Fiscal spending-cut expectations:Growth in the fiscal deficit was once considered one of the key factors pushing up the neutral rate, but market expectations for long-term fiscal expansion have been revised downward.Investors have strong confidence that DOGE will cut fiscal spending by reducing “waste, fraud and abuse,” a view borne out by the relative underperformance of baskets of stocks exposed to federal spending. This expectation has lowered estimates of the long-term neutral rate, putting further downward pressure on UTS yields.
Markets are already pricing in expectations of lower short-term rates ahead. FOMC will not rush to cut rates, but the monetary easing required by the three factors above has been priced in through the end of 2026. The market-implied rate path now indicates that the Fed may reach the trough of its rate-cutting cycle at the end of 2026, consistent with a flattening of the SOFR futures curve.
2025.02.28
III. Market Pulse
Our latest Comments on the economic and market environment
Sluggish Asian consumption: growth trending below expectations
In Asia, although the annual growth rate of household consumption and the GDP share have returned to pre-pandemic levels, giving the appearance of normalization, two key issues are masked by the recovery:
1）Declining marginal propensity to consume:The ratio of the increase in household consumption to the GDP increase remains low in most economies, indicating a lack of momentum in consumption.
2) Weak discretionary spending:Data such as retail sales show that consumer spending on nonessential goods remains weak and spending behavior is cautious
Take Thailand as an example, the improvement in consumption was amplified by the delayed post-pandemic recovery and weak growth in other GDP components (especially public consumption); the actual improvement came mainly from the cash subsidy program implemented by the government in the second half of 2024.But overall, weak consumption reflects structural changes in the post-pandemic economy, for example: new job opportunities are increasingly concentrated in low-wage industries, household savings have declined, and rising food and public utilities costs are squeezing disposable income.
Weakness in the labor market has not become widespread, but some key indicators have deteriorated. Among them, Slower wage growth is a common problem across all major economies, offsetting the boost that easing inflation provides to real disposable income.In Malaysia and Thailand, nominal wage growth fell to 1-2%, roughly in line with inflation, and real income growth has nearly stalled. Although wage growth is relatively faster in the Philippines, it is showing signs of peaking. Quarterly corporate financial data compiled by the Reserve Bank of India (RBI) show a marked slowdown in labor cost growth. The situation is most severe in South Korea: wage growth is slowing while unemployment is rising, further softening the labor market overall.
Moreover, wage growth in Asia is unlikely to pick up in the future.The decline in the ratio of job vacancies to unemployment indicates weak labor demand, weakening workers’ bargaining power. At the same time, uncertainty over U.S. tariff policy may continue to weigh on hiring and expansion decisions by manufacturing firms, limiting wage growth.
Against this backdrop of constrained wage growth, households tend to increase savings to restore their financial balance, further suppressing consumption demand. However, current household savings remain below normal levels. Household savings rates in India, South Korea and Thailand fell sharply in 2022-2023, household borrowing growth slowed in India and South Korea, and actual household debt even declined in Thailand. After the pandemic, household savings as a share of income fell in Indonesia, while the proportion of households with adequate savings declined in the Philippines.As households rebuild savings, household consumption will remain subdued, further weighing on overall economic growth.
In the face of weak household consumption, support from fiscal and monetary policies will also be relatively limited.
Fiscal policy supports consumption mainly through tax adjustments, social spending and cash subsidies.Cash subsidies can help stimulate household consumption in the short term. However, uncertainty remains over whether the subsidies will translate directly into consumption. Some households may prefer to save to cope with strained household finances and future risks, so the actual boost to consumption will fall short of expectations.
Compared with fiscal policy, monetary policy has a more limited stimulative effect.Terminal real rates remain close to pre-pandemic levels in most economies, and are still above those levels in Indonesia and the Philippines. This means monetary easing has limited stimulus capacity and is unlikely to boost consumption effectively.Malaysia’s terminal real rate has fallen substantially, but this depends on whether the government can begin adjusting fuel subsidies in the middle of 2025. If the subsidies are not adjusted, full-year inflation may be lower, pushing up the real policy rate and weakening the effect of monetary easing.
Against a backdrop of heightened global economic uncertainty, household consumption is expected to remain subdued, constrained by slower wage growth, rising demand to rebuild savings, household deleveraging and limited policy support. This also means that, Overall, the three pillars of Asian economic growth in 2025—household consumption, exports and investment—lack clear growth momentum, which may leave the region’s growth below potential.
2025.02.24
How far has deleveraging of long U.S. dollar positions progressed?
The market is currently undergoing a round of deleveraging in long U.S. dollar positions, and the extent to which this process is complete will determine whether the dollar continues to weaken or rebounds.
Deleveraging can be assessed using several market indicators, including fund flows (DTCC options trading), market positioning (G10 currency IMM positions), market sentiment (EM risk appetite) and U.S. 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 the dollar’s further downside.
Source: JPM
2025.02.25
Note: All content in this article is for reference only. It does not constitute investment advice or serve as a basis for any laws, regulations or regulatory policies. Investors should not use or rely on this information as a basis for their decisions.