From February twenty-fourth, two thousand twenty-five to February twenty-sixth, 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 Japanese yen’s gain against the U.S. dollar was markedly weaker than that of other G10 currencies, although the dollar weakened overall and the euro rose by more than 13% over the year, 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. However, the yen’s appreciation during this period was limited; it did not fully follow the dollar’s broader depreciation trend.

The dollar-yen exchange rate remained strongly correlated with U.S. 10-year Treasury yields for most of 2017.From the U.S. election in 2016 through the end of 2017, the dollar-yen exchange rate largely 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. equities fell sharply, and yen trading shifted from being driven by interest rates to being driven by safe-haven demand, As U.S. equities underwent a sharp correction (and global equities also corrected), the yen strengthened, rather than weakening in line with Treasury yields.At the start of 2018, the market’s trading rationale shifted: risk aversion became the dominant driver of the yen, rather than interest-rate differentials.

The market in 22 was driven by interest rates. U.S. 10-year Treasury yields were also rising and U.S. equities were falling then; however, unlike in 2018, the yen did not strengthen along with equities, but instead fell as Treasury yields declined.

2025.02.26

Why the safe-haven rationale for the yen did not hold in 22

At the start 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 most of its key production inputs, the sharp rise in commodity prices unsettled Japan’s economic environment of low inflation, low interest rates, and stable growth.

As import prices rose, Japan needed to exchange more yen for dollars to purchase energy and basic raw materials, pushing up the dollar-yen exchange rate.At the same time, Imported inflation pushed up 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 manufacturing PMI and non-manufacturing PMI for 2 will be released on 3 1, This time, the data may show some noisy fluctuations and are unlikely to offer much in the way of tradable opportunities, although the data themselves will probably come in above expectations.

This upside surprise is driven mainly by workers returning after the Lunar New Year holiday, which should lead to some recovery in manufacturing output.Commodity prices in 2 clearly point to strong front-loaded demand in the U.S. market, which also implies a boost to Chinese export orders.

On the non-manufacturing PMI front, 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, we should wait and see; the durability of this trend remains to be seen, particularly against a backdrop of an unstable recovery in global demand.

Further reading:Notes 250225 Sluggish Asian Consumption: Growth Trends Below Expectations

2025.02.24

The Pro-Cyclical Market Since the Start of the Year

Although markets broadly expected trade wars and policy uncertainty to tighten global financial conditions, 2market movements since 025 have instead displayed an unexpectedly pro-cyclical character. Global financial conditions have eased significantly, equity markets outside the U.S. have surged, and risk assets have rebounded broadly.

Chart: Market trading has in effect been pro-cyclical since 25

Equities have performed strongly, industrial metal prices have surged, credit spreads have narrowed to multi-year lows, and market volatility has generally declined, although foreign-exchange market volatility has remained relatively stable. 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 rationale behind the dollar sell-off: the second phase of trading has arrived

Looking back at the dollar’s movement since the fourth quarter of 2024, its rationale 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 a 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, on the view that 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 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 believed the dollar had 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 primary effect of the trade war on the U.S. is more likely to be higher inflation than slower economic growth.

This shift drove a sharp rise in short-term inflation breakevens, but with the Federal Reserve still maintaining a dovish stance, short-end nominal yields were largely unchanged. Indeed, 2-year Treasury yields were below their prior levels after the release of high-inflation data in 1.This mismatch directly weakened the support the dollar received from real yields and fueled a dollar sell-off over the past month.In other words, real yields are driving the dollar lower.

Further reading: Notes 250225 The Pro-Cyclical Market Since the Start of the Year

At the start of the year, the market broadly believed that U.S. exceptionalism was already 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 rationale was that the dollar’s medium-term vulnerability could stem from a trade-war-induced growth shock, ultimately forcing the Federal Reserve to deliver more easing than was priced into the OIS curve.However, since 2025, the market’s focus has unexpectedly shifted to inflation caused by the trade war rather than an economic slowdown, a macro-level change that took the market by surprise.

Under the original expectations, if the Federal Reserve cut rates in response to a trade-war slowdown, the dollar would come under pressure. Now, although the Fed has not cut rates directly, it has lowered real interest rates through a degree of benign neglect toward the surge in short-term inflation expectations.This means, The Federal Reserve is effectively implementing a degree of 2019-style monetary easing, just through a different channel, although real interest rates remain 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 Fed’s policy response is unlikely to shift in response to changes in short-term inflation data.Therefore, monetary policy may remain on hold over the next few months, which means The downward trend in U.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.In addition, bearish sentiment toward the dollar is strengthening, so It is still too early to take a contrarian long position in the dollar.

The FOMC meeting in 3 will also be a key test for the dollar’s direction. The Federal Reserve may raise its inflation forecast and revise its dot plot, particularly given the strength of the labor market over the past few months.If the dot plot shows that the Federal Reserve has become less tolerant of inflation, this could temporarily halt further dollar weakness.

Finally, although tariff issues have been briefly overlooked by the market, the overall trend is worsening.Over the past two weeks, the direction of the trade war has had a more negative impact on global growth and market confidence. In addition to the announced fentanyl tariffs on Canada and Mexico, risks remain around several sector-specific and reciprocal tariffs (such as those on steel, aluminum, semiconductors, pharmaceuticals, and automobiles). Tariffs on automobiles and pharmaceuticals in particular could dampen 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 multiple 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/ First, look at expectations and what actually happens; 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 it began to recover after the U.S. formally raised import tariffs on steel and aluminum in 2018 3 and only began to recover after the formal increase in import tariffs on steel and aluminum. Trade-policy uncertainty rose after the 2016 election, prompting capital to flow back to the U.S. and benefiting the dollar. However, because in 2017 actual policy action was limited, market caution eased and the dollar retreated.

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 the market’s expectation of an intense trade war, reducing safe-haven demand for the dollar. Foreign-exchange market volatility declined in the second quarter, while the dollar weakened overall.

2/ The second key factor is the U.S. stock market

In the second quarter of 2017, global equities recovered and investors refocused on 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 is supported by growth

In 2017, U.S. growth expectations remained stable, while those for China and Europe improved significantly. The upward revision to eurozone growth was driven 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 shifted capital flows toward markets outside the U.S. Improving global growth expectations led investors to increase their holdings of non-U.S. assets, reducing demand for the dollar.2018 was different: European growth expectations began to decline in the second quarter, which the European Central Bank attributed to weak external demand, a severe German winter, strikes, and other factors. In addition, global trade growth slowed in 2018-2019 (mainly due to tighter monetary policy and escalating trade tensions).

4/ The non-U.S. risk-premium trade is a process of gradual fading

At the beginning 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 was at one point leading in the French presidential election polls. The Alternative for Germany party was also expected to enter the federal parliament, while the Dutch Party for Freedom could have dominated the parliamentary election.

The actual outcomes 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 elections. 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 eurozone’s political risk premium, increased 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, largely because of the shift in the ECB’s policy stance.

In 17 6, the European Central Bank revised its assessment of the economic outlook, judging growth risks to be broadly balanced, and removed the wording 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 raised the euro-area shadow short rate by about 75 basis points, keeping the U.S.-European rate differential stable and reducing the dollar’s relative appeal.

Meanwhile, expectations for the Trump administration’s fiscal policy stabilized in 17 4, then picked up again only 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

III. Market Pulse 

Our latest Comments on the economic and market environment

Sluggish Asian Consumption: Growth Trends Below Expectations

In Asia, although annual household consumption growth and the share of GDP have returned to pre-pandemic levels, appearing to normalize on the surface, two key issues are being obscured beneath the recovery:

1）Declining marginal propensity to consume:The ratio of the increase in household consumption to the increase in GDP remains low in most economies, indicating insufficient momentum in consumption

2) Weak discretionary spending:Data such as retail sales show that consumer spending on non-essentials remains weak and that spending behavior is cautious

Take Thailand, for example, the improvement in consumption was magnified by the delayed post-pandemic recovery and weak growth in other GDP 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 a greater concentration of new jobs in low-wage industries, lower household savings, and rising food and public-utilities costs squeezing disposable income.

Labor-market weakness 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 falling inflation would otherwise give to real disposable income.In Malaysia and Thailand, nominal wage growth fell to 1-2%, roughly matching inflation, and real income growth nearly stagnated. Wage growth in the Philippines, although relatively faster, is showing signs of peaking. Quarterly company financial data compiled by the Reserve Bank of India (RBI) show a clear slowdown in labor-cost growth. South Korea’s situation is the most severe: wage growth is slowing while unemployment is rising, and the overall labor market is weakening further.

Moreover, the likelihood of wage growth picking up again in Asia is low.The decline in the ratio of job vacancies to unemployment indicates weak labor demand, weakening workers’ bargaining power. At the same time, uncertainty around U.S. tariff policy may continue to weigh on hiring and expansion decisions by manufacturers, limiting wage growth.

Against this backdrop of constrained wage growth, households tend to increase savings to restore their financial balance, further suppressing consumer demand. However, household savings remain below normal levels. Household saving rates in India, South Korea, and Thailand fell sharply in 2022-2023, while household borrowing growth slowed in India and South Korea, and real household debt in Thailand even declined. Since the pandemic, the share of household savings in Indonesia has fallen, while the proportion of households with sufficient savings has decreased in the Philippines.As households rebuild 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 supports consumption mainly through tax adjustments, social spending, and cash subsidies.Cash subsidies can help stimulate household consumption in the short term. However, it remains uncertain whether the subsidies will translate directly into consumption. Some households may prefer to save to cope with strained household finances and future risks, meaning the actual boost to consumption will fall short of expectations.

Compared with fiscal policy, monetary policy has a more limited stimulative effect.Real terminal rates in most economies 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 effectively boost consumption.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 rising global economic uncertainty, household consumption is expected to remain subdued, constrained by slower wage growth, a greater need to rebuild savings, household deleveraging, and limited policy support. This also means, Overall, the three main pillars of Asian economic growth in 2025—household consumption, exports, and investment—lack clear growth momentum, which could leave the region’s growth below its potential.

2025.02.24

How far has the unwinding of long-dollar positions progressed?

The market is currently undergoing a round of deleveraging in long-dollar positions, and this The extent to which the process is complete will determine whether the dollar continues to weaken or rebounds.

Deleveraging can be assessed using several market indicators, including capital flows (DTCC options trading), market positioning (G10 foreign-exchange IMM positions), market sentiment (EM risk appetite), and the dollar valuation model (TWI fair-value calculation);

Overall, Since the end of 2024 10, about 3/4 of the dollar buying has been unwound, and this adjustment should limit the dollar’s further downside.

Source: JPM

2025.02.25

Note: All content herein is for reference only and 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 decision-making.