US

USD slide shows signs of stabilizing. The risk is the structural drags on USD - fading confidence in US trade and security policy, politicization of the Fed, and worsening US fiscal credibility – continue to outweigh the more neutral cyclical USD backdrop and pull USD lower and further away from rate differentials, like it did in Q2 last year.

Bessent emphasized yesterday that the US is “absolutely not” intervening in the currency market to weaken USD/JPY and reaffirmed the Treasury’s strong dollar policy. USD/JPY had a kneejerk 1% upswing before pulling back. We remain bullish on JPY regardless of whether there is intervention or not. First, USD/JPY is significantly overvalued relative to the level implied by US-Japan rate differentials. Second, worries over Japan fiscal profligacy are overdone given that growth comfortably exceeds borrowing costs. Third, Japan’s mix of loose fiscal policy and tighter monetary policy is JPY positive.

German Chancellor Friedrich Merz voiced his concerns yesterday about a weak dollar and a strong euro. Merz noted “We simply have to become more competitive and stronger, especially given the currency exchange rates,” adding “the dollar exchange rate is a considerable additional burden for the German export industry.” Merz comments came on the heels of Governing Council member Francois Villeroy de Galhau and Austrian central-bank Governor Martin Kocher who both implied that a stronger euro may have implications for ECB policy settings.

The FOMC is less dovish. As was widely expected, the FOMC kept the target range for the Fed funds rate unchanged at 3.50-3.75%. However, the FOMC softened its easing bias after scrapping previous reference about rising downside risks to employment. Instead, the FOMC noted that “Job gains have remained low, and the unemployment rate has shown some signs of stabilization.” The FOMC reiterated that inflation “remains somewhat elevated,” while “uncertainty about the economic outlook remains elevated.” That argues for the Fed staying on hold for some time.

All but two FOMC members backed a hold, underscoring broad confidence in the current policy stance. Unsurprisingly, Fed Governor Stephen Miran and Fed Governors Christopher Waller voted for a 25bps cut.

The key takeaway from Fed Chair Jay Powell’s press conference is that the FOMC was in no rush to resume easing. Powell noted that tension between employment and inflation has diminished while pointing out “we're well-positioned here to watch how the economy performs, look at the data.”

Fed funds futures pricing hardly budged after the FOMC meeting. Markets still imply little chance of a cut at the next two FOMC meetings (March 18, and April 29). A 25bps cut remains 80% priced in for the June 17 meeting, while a total of nearly 50bps of easing continues to be priced in by year-end.

We now see the risk that the Fed delivers less cuts than is currently discounted by the markets. Leading indicators point to a resilient US growth outlook, a big fiscal thrust is expected over Q1 reflecting a boost from the One Big Beautiful Bill Act (OBBBA), weekly jobless claims continue to suggest there’s no layoff spiral underway, and underlying PCE inflation is stalling above the Fed’s 2% target.

US data today: weekly jobless claims and November trade balance (both at 1:30pm London, 8:30am New York).

Gold prices continue to rocket to new high and crude oil prices are up near their highest level since September 2025, underpinned by the possibility the US uses military force against Iran. The USS Abraham Lincoln aircraft carrier along with its escorts sailed into Middle Eastern waters this week after being redirected from operations in the Indo-Pacific.

SWEDEN

Riksbank delivered on expectations. Today, the Riksbank left the policy rate unchanged at 1.75% for a third straight meeting and reiterated that “the policy rate is expected to remain at this level for some time to come.” In its December Monetary Policy Report, the Riksbank penciled in the policy rate at 1.75% until Q4 2026, followed by a 25bps hike over the subsequent two years.

The swaps curve price-in steady rates at 1.75% over the next twelve months and that’s unlikely to change much in the near term. USD/SEK is trading near its lowest level since November 2021, with the next big support level offered at 8.5000.

CANADA

USD/CAD broke below its June 2025 low at 1.3540. BOC delivered on expectations. Yesterday, the BOC left the policy rate unchanged at 2.25% for second straight meeting. The BOC also reiterated its on hold guidance noting that “the current policy rate remains appropriate.”

However, the BOC adopted a marginally more cautious tone. The BOC stressed that “uncertainty is heightened” vs. “uncertainty remains elevated” in December. That means the BOC will not be in a rush to start raising the policy rate. Indeed, the BOC trimmed its inflation and real GDP growth forecasts for Q4 2026. We see room for the market to further push out expectations for a BOC rate hike. The swaps curve price in 44% odds of a 25bps rate increase to 2.50% over the next twelve months.

SOUTH AFRICA

USD/ZAR plunged to its lowest level since June 2022 on broad USD weakness and the ongoing rally in precious metals. South African Reserve Bank (SARB) policy decision is today (1:00pm London, 8:00am New York). SARB is expected to keep rates on hold at 6.75% after delivering a 25bps at its last meeting.

However, it’s a close call: 11 of the 24 analysts polled by Bloomberg see a rate cut. We think SARB can afford to pause easing because inflation is settling around the bank’s inflation target of 3% (with a +/-1% tolerance band). The swaps curve price in nearly 75bps of cuts in the next twelve months and the policy rate to bottom around 6.00%, in line with the SARB’s base case scenario.

BRAZIL

Brazil’s central bank (BCB) kept the policy rate at 15.00% for a fifth consecutive meeting as expected and signaled it plans to start easing at its next March 18 meeting. Specifically, BCB highlighted “In a context of more evident lower inflation and monetary policy transmission, the strategy entails interest rate calibration.” The swaps curve implies 275bps of BCB rate cuts to 12.25% in the next twelve months. The risk is BCB does not ease as much as is currently priced in given that the October 2026 general election skews fiscal policy toward near-term spending support.