We have revised our currency outlook to reflect a more rapid appreciation in the USD in the first half of this year. Implied currency volatility has increased over the past month, particularly for the GBP and the major currencies. The DXY Index’s upward momentum, fuelled by the Trump Trade rally, has remained intact after it broke above its two-year range.
The US economy continues to show remarkable resilience compared to the stagnation in Europe and the lacklustre Chinese economy amid heightening global uncertainties driven by the incoming Trump administration’s unpredictable trade and foreign policies. The Fed has adopted a cautious stance on disinflation and rate cuts, with the futures market pricing in only one cut this year, now delayed to June. Meanwhile, markets anticipate other central banks will implement more aggressive rate cuts than the Fed, further widening the US yield differentials against its peers. In China, the government temporarily halted government bond purchases after yields fell to record lows due to strong demand outpacing supply.
Following last Friday’s stronger-than-expected US nonfarm payrolls, surprises in this Wednesday’s US CPI inflation could further lift the USD. Consensus expects headline inflation to rise to 2.9% YoY in December from 2.7% in November and core inflation to stay unchanged at 3.3% for a third month. US equities continued their sell-off after the University of Michigan’s one-year inflation expectations increased to 3.3% in January vs. consensus to stay unchanged at December’s 2.8%.
This week will be eventful because the US Senate has scheduled confirmation hearings for several of President-elect Donald Trump’s cabinet nominees. Scott Bessent’s hearing as Treasury Secretary on January 16 will be of particular interest to financial markets. Bessent’s “3-3-3” economic plan aims to 1) reduce the budget deficit to 3% of GDP within Trump’s term through fiscal reforms; 2) stimulate 3% economic growth through deregulation and reshoring initiatives; and 3) achieve energy independence by increasing daily domestic oil and gas production to 3 million barrels. Markets will closely watch for indications of a pragmatic and measured approach to implementing Trump’s agenda.
During his hearing as Secretary of State on January 15, Marco Rubio, known as a leading China hawk in Congress, will align with Trump’s confrontational and assertive stance on foreign policy, particularly against major geopolitical adversaries. Similarly, Pete Hegseth’s hearing as the Secretary of Defense on January 14 will be monitored, especially in light of Trump’s recent controversial comments about potentially using military force to acquire Greenland and control the Panama Canal.
Trump’s inauguration as the 47th President of the United States on January 20 looms large. His immediate plans include imposing a 25% tariff on goods from Canada and Mexico and an additional 10% tariff on imports from China. All three countries have indicated their intentions to retaliate with tariffs on US goods, raising the risk of a trade war unless all sides engage in diplomatic negotiation to de-escalate tensions.
Quote of the Day
“Power without legitimacy tempts tests of strength; legitimacy without power tempts empty posturing.”
Henry Kissinger
January 13 in history
In 1975, US Secretary of State Henry Kissinger hinted at military action against oil countries in case of “actual strangulation of the industrialized world” in the wake of the oil shock.
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