The US Dollar continued its rise with yields and safe haven sanctuary in 2024, thwarting the BRICS declaration of the end of the greenback. It remained a source of stability as instability attained momentum globally at the “periphery.” The dollar also got sought for carry trades such as the Japanese Yen and Mexican peso though these featured their own moments of extreme volatility. Yen weakness provided key support to dollar melt-up dynamics with BOJ slow-motion “normalization” in a world of fast-moving dynamics.
China has been a flux all year as it’s Yuan collapsed along with Chinese yields. The dollar has somewhat of a second coming after U.S. and global yields surged higher as the Fed began its easing cycle.
Out of the major currencies the USD dollar gained most against the New Zealand dollar (11.5%), then the Norwegian krone 10.7% and Japanese yen 10.3%. Against the minor names the greenback soared most against the Argentine peso (21.6%), Brazilian real 21.4% and the Russian ruble 21.2%.
The US dollar benefited from all the redirection of blame at the Fed about inflation from the US administration and it’s publishing team (mainstream media) one has to understand it is a global phenomenon outside the Fed’s Control. With the war drums louder than ever the supply chain issues got out of control. The Federal Reserve is not in control of global energy and commodities prices. Another important aspect is the Fed doesn’t control corporate pricing or wage decisions.
USD v. Majors in 2024:
- New Zealand dollar fell 11.5%,
- Norwegian krone 10.7%,
- Japanese yen 10.3%,
- Australian dollar 9.2%,
- Swedish krona 9.0%,
- Canadian dollar 7.9%,
- Swiss franc 7.3%,
- Euro 6.2%.
USD v. Minors in 2024:
- Argentine peso declined 21.6%,
- Brazilian real 21.4%,
- Russian ruble 21.2%,
- Mexican peso 18.5%,
- Turkish lira 16.5%,
- Hungarian forint 12.6%,
- Colombian peso 12.5%,
- South Korean won 12.5%.
Currency Speculation Soared
“Trading of currency options swelled to a record after Donald Trump’s victory in the US presidential election, as traders rushed to bet on further dollar gains. Over $160 billion worth of contracts exchanged hands on Wednesday, the highest daily volume in data going back to 2013… Trading of euro options was four times higher than the recent average…, while the EBS platform saw an all-time record for the Chinese renminbi. Most of the activity on over-the-counter trades was driven by new positions betting on a stronger dollar…” November 8 – Bloomberg (Vassilis Karamanis)
The U.S. Dollar Index jumped 0.3% (and 7.1% for the year) to 108.49, benefiting largely at the expense of a weaker euro.
The massive liquidity sloshing around stems the downside and promotes the upside, until it doesn’t. Let’s not forget the carry trade adding to the mix with the yen and Mexican peso at the fore front. These elements popping out of the risk acceptance matrix for a time and quickly reentering after the August yen carry trade swoosh.
Talking about sloshing around in September 2024 Xi Jinping promised to spend whatever it takes to reach growth targets as he tapped the reflation panic button. A Reuters article placed Beijing’s stimulus at $1.4 TN. On top of a system locked in massive credit expansion, upwards of $5 TN annually. He is pushing hundreds of billions to the stock market, hundreds of billions to the festering local government sector, hundreds of billions to the to attempt to arrest the slide in the apartment markets. What this did was see the yuan continue to fall against the US dollar.
“China’s capital markets outflow reached a record high of $45.7 billion in November, according to official data tracking cross-border payments, as Donald Trump’s U.S. presidential election win roiled global portfolio flows. Cross-border receipts from portfolio investments were $188.9 billion, while payments totaled $234.6 billion, resulting in the biggest monthly deficit on record…” December 16 – Reuters
As Beijing pushes ever harder to sustain its Bubble Economy and thwart systemic debt crisis, the world is watching. Ongoing massive Credit growth ensures an only greater debacle, while Beijing directives are bringing new meaning to “malinvestment.” Importantly, this is not the good old days when perceptions of a great and infallible Beijing meritocracy had global analysts – and rating agencies – reverent and inhibited. The bloom is off the rose, and skepticism is these days palpable.
Any pushback to fledgling tightening these days ensures excessively loose financial conditions.
Astute currency traders were aware of geopolitical, climate change developments and what an out of depth, politically motivated administration decides are outside the Fed’s sphere of influence. What does this all mean for the dollar, it is has had two impacts one saw the US dollar benefit from the periphery but lose to gold. The change in the curve and therefore forward margins always has impacted the dollar positively.
The US dollar benefited from all the redirection of blame at the Fed about inflation from the US administration and it’s publishing team (mainstream media) one has to understand it is a global phenomenon outside the Fed’s Control. With the war drums louder than ever the supply chain issues got out of control.
A Reminder: U.S. and global yields surged higher as the Fed began its easing cycle:
- Ten-year Treasury yields, closing September 17th at 3.65%, ended the year 92 bps higher at 4.57%.
- EM bonds were taken behind the woodshed. For the quarter, spikes in dollar-denominated yields included Panama 177 bps, Brazil 137 bps, Mexico 99 bps, Peru 87 bps, Chile 85 bps, Indonesia 83 bps, Philippines 75 bps, Saudi Arabia 71 bps, and Turkey 58 bps.
- The spike in local currency bond yields was even more dramatic: Brazil 272 bps, Colombia 177 bps, Mexico 109 bps, Turkey 87 bps, Chile 85 bps, Romania 78 bps, Poland 64 bps, Indonesia 54 bps, and the Czech Republic 42 bps.
“A surging US dollar and a ‘confluence of bad news’ have sparked the biggest sell-off in emerging market currencies since the early stages of the Federal Reserve’s aggressive rate-raising campaign two years ago. A JPMorgan index of EM currencies has fallen more than 5% over the past two-and-a-half months, putting it on course for its biggest quarterly decline since September 2022. The decline has been broad, with at least 23 currencies tracked by Bloomberg falling against the dollar this quarter.” December 11 – Financial Times (Harriet Clarfelt)
Surging Dollar Brought Intervention from Japan, South Korea and China
Post Trump 2.0 its worth remembering in the first quarter the dollar rode high against almost every major currency. We saw central banks, from Japan, China and India intervene, or consider intervening, to bolster their currencies. The yen in view of USDJPY 152 and the yuan struggling to break back below 7.2 USDCNH officials have stepped up efforts to stem any further depreciation.
In Japan it’s been verbal warnings and intervention, in China it has been state banks buying yuan and selling dollars. Remember these two are major competitors for export dollars. With that there’s a school of thought that Beijing could have grown more tolerant of a weak yuan to maintain its competitive edge against the yen.
Japan’s predicament is a major issue. Yet the sustainability of China’s currency peg might be the elephant in the market. The yen has devalued 11.3% versus the renminbi over the past year, with the Indonesian rupiah down 4.3%, the Thai baht 3.2%, and the Malaysian ringgit 2.2%.
“Japan said it stepped into the foreign exchange market twice last quarter, as speculation grows that more moves may be brewing given the recent bout of renewed yen weakness. The Ministry of Finance intervened on July 11 and 12, spending ¥3.17 trillion ($20.7bn) and ¥2.37 trillion respectively to prop up the yen…” November 7 – Bloomberg (Erica Yokoyama)
Japan’s Finance Minister Shunichi Suzuki said in June that “foreign exchange intervention should be done in a restrained manner, after data suggested Tokyo tapped a vast pool of foreign reserves for its recent yen-buying operations. ‘Foreign exchange intervention should be done with its necessity and effectiveness taken into account,’ Suzuki said… While intervention could be used to contain excessive moves in the currency market, such action ‘should be conducted in a restrained manner,’ Suzuki said.” June 6 – Reuters (Makiko Yamazaki, Tetsushi Kajimoto and Takaya Yamaguchi):
With China’s apartment Bubble deflation gaining further momentum, Beijing faces huge challenges to attain growth mandates. Maintaining competitiveness for China’s massive export sector will be a top priority. Especially with its archrival’s economy and stock market booming, Beijing is resorting to increasingly desperate measures to hold Bubble deflation at bay. According to Bloomberg, “China’s sovereign wealth fund likely bought at least $43 billion of onshore exchange-traded funds in the first quarter” – and this was only a portion of enormous “national team” market support.
“China ramped up support for its currency via the daily reference rate after the Federal Reserve’s caution over future interest rate cuts boosted the dollar and sent the offshore yuan to a one-year low. The People’s Bank of China set the so-called fixing at the strongest bias since July versus the average estimate in a Bloomberg survey on Thursday. That sent the offshore yuan 0.2% higher.” December 18 – Bloomberg (Neha D’silva and Iris Ouyang)
The seeds of concern were sown back in April
“The United States, Japan and South Korea agreed to ‘consult closely’ on foreign exchange markets in their first trilateral finance dialogue on Wednesday, acknowledging concerns from Tokyo and Seoul over their currencies’ recent sharp declines. The rare warning from the three countries’ finance chiefs came as receding expectations of a near-term U.S. interest rate cut pushed the yen to 34-year lows, keeping markets on alert on the chance of an intervention by Japan to prop up the currency.” April 17 – Reuters (Saqib Iqbal Ahmed)
Beijing used to claim they had studied and learned from Japan’s Bubble experience. Chinese officials later criticized U.S. and “western” central banks for adopting inflationary QE measures. Well, look who’s now talking central bank bond buying.
Moving on into 2025 an overheating economy, coupled with tariff and trade war risks, creates a bond market challenge. What comes with that is a foreign exchange challenge.
Basis and Carry Trade Sustainable?
A huge question for the dollar, particularly at the periphery is the carry and basis trades.
Risk Matters: Don’t forget the August 5th, 2024, Carry Trade Shake:
A Geopolitical Tinderbox Supports the Dollar (and Gold)
John Maynard Keynes, 1920: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose.”
Key Currencies Versus the US Dollar in 2004
(Note weekly charts have been updated to February 28, 2025, for the reader via KnovaWave)
Asia Pacific
Australian Dollar – AUDUSD
The Australian dollar traded towards a 5 year low in the New Year in a tumultuous week, it has continued lower after breaking a three-month low of US65.1¢ on news of a Donald Trump’s US election victory before rebounding to US66.51¢ on hopes of fresh China stimulus. The Aussie dollar had been correcting since completing a 5 at the psych 80 level to fall under the weekly cloud in emotive fashion. The Australian dollar fell to test of the August lows of 0.7106 with Omicron fears. When that double bottom support broke it retested the Murrey Math Levels. Resistance the Cloud, Tenkan and Kijun like many commodities. From there it has been a combination of a stronger US dollar, a collapsing Chinese economy & concerns over the US economy.
Japanese Yen – USDJPY
Yen weakness provided key support to dollar melt-up dynamics with BOJ slow-motion “normalization” in a world of fast-moving dynamics. The dollar yen traded 160.17 this cycle, the first time above 160 since April 1990. Governor Kazuo Ueda on that move basically ceded the yen fragility issue to the Ministry of Finance (MOF), affirming it wasn’t in the BOJ’s purview. He conveyed little concern for yen weakness, while downplaying its inflationary impact. The market accordingly took the yen out to the woodshed.
USDJPY broke above after weakness with Treasury yields to rush to +2/8 and channel convergence, we have come a long way from that 108.00 massive support for dollar-yen back through the top of the flat-topped triangle at 151/152. Any change will come from the weekly Kijun. Use your USDJPY Murrey 7/8 8/8 grid for now. EURJPY AUDJPY will determine risk on/off.
Chinese Yuan – USDCNH
China has been battling a weak economy for years and has been flooding its economy with liquidity to no avail, the result, falling yields and a record low for the Yuan against the US dollar. So far it has been defended at a triple top.
To begin 2025 the onshore yuan weakened past the level that China had been defending throughout December. The yuan breached the psychological milestone of 7.3 per dollar for the first time since late 2023, amid concerns over China’s economic struggles and a widening bond yield discount to the US. The move came even as the central bank maintained its support for the currency with its daily reference rate that Friday.
China manages its currency onshore by setting a daily reference rate against the dollar at 9:15 a.m. local time, around which it is then permitted to trade in a 2% range. The PBOC has kept the daily rate in such a tight range this year that a gauge of volatility in the fixing has dropped to the lowest since before the shock yuan devaluation of 2015.
We look back at Chinese rescue attempts
“Chinese businesses are hoarding dollars because they expect their own currency to weaken, and that in turn is exacerbating a slide in the yuan… This feedback loop has been playing out for months in mainland currency markets, spurred on by the dollar’s rising yield. Foreign exchange deposits have climbed $53.7 billion since September to $832.6 billion… Analysts say one of two things needs to happen to end the downward spiral: the Federal Reserve needs to make deep rate cuts or the yuan needs to hit some form of a trough. Both seem distant.” April 17 – Reuters
April 22 – Bloomberg: “China’s Ministry of Finance said it supports allowing the central bank to buy and sell government bonds, reaffirming a comment by President Xi Jinping that ignited market speculation about a change of monetary strategy. The ministry called for stepping up coordination between fiscal and monetary policy and ‘improving the mechanisms of base money injection and money supply adjustment,’ in an article written by a study group and published by the People’s Daily… It was based on a recent book that compiled Xi’s statements about finance and economics. In that text, Xi was quoted as saying that the People’s Bank of China should gradually increase the buying and selling of government bonds in open-market operations.”
April 24 – CNBC (Evelyn Cheng): “China’s state-directed economy may be creating the conditions for a new wave of bond defaults that could come as soon as next year, according to an S&P Global Ratings report… It would be the third round of corporate defaults in about a decade, the ratings agency pointed out. It comes against a backdrop of extremely few defaults in China amid concerns about overall growth in the world’s second-largest economy. ‘The real thing to watch for policymakers is whether the current directives are creating distorted incentives in the economy,’ Charles Chang, greater China country lead at S&P Global Ratings, said…”
June 3 – Reuters (Alun John): “More global reserve managers plan to increase exposure to the now high-yielding U.S. dollar as their interest in China’s yuan has soured due to low returns and geopolitical tensions, the Official Monetary and Financial Institutions Forum said. The data, from a survey carried out by the think tank…, challenges – at least in the short term – the trend towards de-dollarisation, the idea that countries will diversify away from dollars.”
November 13 – Bloomberg: “China moved to support the under-pressure yuan for a second day, through its daily reference rate for the managed currency. The People’s Bank of China set the so-called yuan fixing at 7.1966 per dollar, about 359 pips stronger than the average estimate… On Wednesday, the gap between the fixing and estimate was 445 pips, the widest since early August. The yuan has come under pressure alongside global peers as Donald Trump’s US election victory bolstered the dollar to its highest in two years.”
November 25 – Bloomberg (Chongjing Li): “A key level is starting to emerge for the yuan, as China tightens its grip on a currency that is facing fresh tariff threats from US President-elect Donald Trump. The People’s Bank of China has consistently set its daily reference rate — Beijing’s preferred tool to guide yuan expectations — stronger than 7.2 per dollar since the US election, despite wild swings in the greenback and increasing predictions by analysts that the central bank would buckle.”
November 26 – New York Times (Keith Bradsher): “Beijing has a powerful tool for responding to President-elect Donald J. Trump’s threatened new tariffs on Chinese goods: It could start a currency war, a step that poses formidable risks for China as well as the United States. Letting China’s currency, the renminbi, lose value against the dollar would be a tried-and-true answer to tariffs. A cheaper renminbi would make Chinese exports less expensive for overseas buyers, mitigating the harm to China’s competitiveness from Mr. Trump’s tariffs. Beijing did just that in 2018 and 2019, when Mr. Trump imposed tariffs in his first term.”
December 11 – Reuters: “China’s top leaders and policymakers are considering allowing the yuan to weaken in 2025 as they brace for higher U.S. trade tariffs as Donald Trump returns to the White House. The contemplated move reflects China’s recognition that it needs bigger economic stimulus to combat Trump’s threats of punitive trade measures, people with knowledge of the matter said. Trump has said he plans to impose a 10% universal import tariff, and a 60% tariff on Chinese imports into the United States. Reuters spoke to three people who have knowledge of the discussions about letting the yuan depreciate…”
December 28 – Bloomberg: “China’s ambitious campaign to revive its flagging stock market has made the yuan an unintended casualty, with record dividend payouts leading to outflows. Interim dividends paid by Hong Kong-listed Chinese firms are set to reach $12.9 billion between January and March, a record level for the first quarter… That comes as fourth quarter levels have already topped $16.2 billion, the most ever for the period and up 47% compared with a year ago.”
South Korean Won – USDKWN
The won has slightly appreciated so far into 2025 after tumbling since October 2024 by a cumulative 12% depreciation to the dollar both on domestic political developments and external concerns related to a less dovish Federal Reserve and trade policy risks. It had dropped to its weakest level in 15 years.
The Americas
The Canadian dollar and Mexican dollar have weakened since the mention of Trump tariffs on the two countries.
Canadian Dollar – USDCAD
The Loonie has been in a steady downtrend since 2021, on yield pressures, weakening economic metrics and political uncertainty. The USDCAD hit a 3 year high in June and corrected that in 3 waves led by the AUD and NZD with oil price impacting direction from there the selling of the Loonie resumed. From there it broke the 2020 highs and tested 1.48 before reverting back on tariff gamesmanships in 2025.
Mexico Peso – USDMXN
Mexico’s currency is part of a carry trade that involves investors borrowing in currencies that have low interest rates, such as the Japanese yen or Swiss franc, and buying higher yielding ones such as the Mexican peso or, recently, the U.S. dollar. It has boomed in popularity as interest rates have diverged around the world and market volatility has stayed low. after the Mexican election this year the peso had a dramatic fall against the yen – it dropped 4.4% on that Monday in its biggest daily decline since the COVID-19 crisis.
The peso had climbed to the strongest in almost nine years driven by relatively high local interest rates and low currency volatility until, that sell off.
December 9 – Bloomberg (Alex Vasquez and Maria Eloisa Capurro): “Mexico’s headline inflation slowed slightly more than expected in November, boosting the odds of a fourth straight interest rate cut at the central bank’s meeting next week. Official data… showed consumer prices rose 4.55% from a year prior, under both the 4.6% median estimate…”
Brazilian Real – USDBRL
December 19 – Bloomberg (Martha Beck, Vinícius Andrade, Maria Eloisa Capurro and Leda Alvim): “As the currency craters in Brazil, thrusting the country’s markets into the international spotlight for the first time in years, a grim reality is setting in for top economic aides to President Luiz Inacio Lula da Silva. They are, they fear, powerless to do much to stop the panic… The central bank has ramped up intervention in currency markets to try to stem the losses amid what Governor Roberto Campos Neto called an ‘atypical’ outflow. It has stepped in either directly or through swaps almost every day for the past week, spending close to $14 billion to give some support to the real… On Thursday alone it sold $8 billion in back-to-back spot auctions — that’s the biggest daily sale of dollars since at least 1999, when Brazil adopted a floating exchange rate regime…”
Europe
Euro – EURUSD
Euro continued to bump up against that downtrend line from 2020 and spinning around the 50% of that year’s panic sell. The euro trades in what seems like eternal flags in the channel. We watch if Kijun (pink) testing Tenkan (orange) creates any impulse as EURUSD consolidates under the cloud and break up level from 2022. Watch 3 waves to see development for continuation and for impulse off Chikou rebalance. Governed by EURGBP and Bund volatility.
British Pound – USDGBP
British pound rose in a classic rising wedge since its late 2022 spike classic retest until its daily break late 2024 which brought a weekly kiss of death. From there a weekly cloud break with magnet pulls of cloud twist after ABC correction – will need Tenkan to break through Kijun for more strength. The upcoming months will be heavy on UK data and EU, Ukraine speculation which could mean an eventful time for the British pound.
On the Risk Radar
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