Core Viewpoint - The State Administration of Foreign Exchange of China reported the trading volume of the foreign exchange market for December 2025, indicating significant activity in both the customer and interbank markets, as well as in spot and derivatives trading [1]. Group 1: December 2025 Trading Data - The total trading volume in China's foreign exchange market (excluding foreign currency pairs) reached 28.17 trillion RMB (approximately 3.99 trillion USD) in December 2025 [1]. - The customer market accounted for 4.78 trillion RMB (about 0.68 trillion USD), while the interbank market had a trading volume of 23.39 trillion RMB (around 3.31 trillion USD) [1]. - The spot market saw a cumulative trading volume of 10.44 trillion RMB (equivalent to 1.48 trillion USD), and the derivatives market totaled 17.73 trillion RMB (approximately 2.51 trillion USD) [1]. Group 2: Annual Trading Data for 2025 - For the entire year of 2025, the cumulative trading volume in China's foreign exchange market reached 304.57 trillion RMB (approximately 42.64 trillion USD) [1].

Core Insights - The total turnover of China's foreign exchange market reached 28.17 trillion RMB (approximately 3.99 trillion USD) in December 2025 [1] - The cumulative turnover for the entire year of 2025 was 304.57 trillion RMB (approximately 42.64 trillion USD) [1] Market Breakdown - The customer market turnover was 4.78 trillion RMB (approximately 0.68 trillion USD) [1] - The interbank market turnover was 23.39 trillion RMB (approximately 3.31 trillion USD) [1] - The spot market turnover was 10.44 trillion RMB (approximately 1.48 trillion USD) [1] - The derivatives market turnover was 17.73 trillion RMB (approximately 2.51 trillion USD) [1]

A friend called me some time ago to share her heartbreak over the declining value of the U.S. dollar. She is a forex broker who told me that the dollar's decline isn't inspiring confidence within the global trading community. I just checked the charts and noticed that the U.S. dollar index, which calculates the value of the USD relative to a basket of foreign currencies, has fallen to 96.16 on Jan. 27. It is the index's lowest point since mid-February 2022. Related: Dollar debasement fears send 'Bitcoin ...

Core Insights - The stability of a major global currency, specifically the Japanese yen, is under threat, which is impacting Bitcoin in the short term [1] - A potential coordinated currency intervention by the Federal Reserve has led to a significant appreciation of the yen, which surged 3.39% against the dollar [2] - The strengthening yen could disrupt the carry trade strategy that has benefited risk assets like Bitcoin, as investors may need to liquidate these assets to cover their positions [5][6] Currency Intervention and Market Impact - The New York Fed's procedural rate check has raised concerns about a coordinated intervention to strengthen the yen, which could involve selling U.S. dollars to buy yen [2][6] - A stronger yen threatens to reverse the carry trade, where investors borrow yen at low interest rates to invest in higher-yielding assets, including Bitcoin [5] - The recent turmoil in Japan, including a spike in government bond yields to 4%, has contributed to the yen's volatility and the subsequent impact on risk assets [3] Bitcoin's Performance and Market Dynamics - Bitcoin has shown minimal growth of only 0.14% year-to-date, contrasting with rising prices in gold and silver, indicating a lack of investor confidence amid changing macroeconomic conditions [4] - The current market dynamics suggest that Bitcoin's price is increasingly influenced by traditional financial flows, with leveraged positions facing heightened costs due to rising volatility premiums [6][7] - The expectation of intervention has led to increased selling pressure on Bitcoin as investors liquidate positions to cover yen loans [6][7]

Summary of the January FOMC Preview Conference Call Industry Overview - The conference call focuses on the Federal Reserve's monetary policy, specifically the expectations surrounding the January FOMC meeting and its implications for the U.S. economy and financial markets. Key Expectations - The Federal Reserve is expected to maintain the federal funds rate target range at **3.5-3.75%** during the January meeting, indicating a "dovish hold" [5][8][7] - The Fed has initiated bill purchases to keep reserve balances at "ample" levels, a policy expected to continue without additional changes in January [5][8] - The Committee is anticipated to upgrade its assessment of economic growth from "moderate" to "solid," reflecting improved consumer spending momentum [5][9] - The statement is likely to remove references to increased downside risks to employment, suggesting a more favorable outlook for the labor market [5][12] Communication Strategy - A key focus will be on how Chair Powell communicates the pause in rate cuts, with expectations leaning towards a "dovish hold" that emphasizes the potential for future rate reductions if inflation pressures ease [5][24][23] - There is a possibility of a "hawkish hold" if the committee signals a more durable pause, which would indicate the end of the rate-cutting cycle [5][24][25] Market Implications - Rates strategists recommend investors maintain a neutral position in U.S. Treasury duration and curve, while favoring long positions in 2-year UST SOFR swap spreads [5][5] - FX strategists note that the case for U.S. dollar (USD) weakness is less pronounced but remains, with a hawkish FOMC likely to weigh on the Australian dollar (AUD) more than other currencies [5][5] Economic Indicators - Recent stabilization in the labor market and solid economic activity data are seen as justifications for the Fed's decision to pause rate cuts [7][23] - The unemployment rate is projected to remain low, with a slight decline to **4.375%** noted, indicating limited slack in the labor market [23][23] - Inflation data has shown muted signals, with concerns shifting towards inflation persistence rather than further increases [11][11] Forward Guidance - The Fed is expected to maintain language regarding the "extent and timing of additional adjustments" to the target range, signaling an easing bias [5][13] - The anticipated changes in the FOMC statement reflect a shift towards a more optimistic economic outlook, while still acknowledging divisions within the committee regarding the appropriate policy path [5][27][29] Additional Considerations - The Fed's recent speeches indicate a narrowing of divisions among committee members, suggesting a more unified outlook on economic conditions [27][28] - Powell is likely to address various topics during the press conference, including productivity gains, AI's impact on the labor market, and risks to Fed independence [30][31] Conclusion - The upcoming FOMC meeting is poised to reflect a cautious yet optimistic stance on the U.S. economy, with the Fed maintaining a "dovish hold" while preparing for potential future rate cuts depending on inflation trends and labor market conditions [5][7][24]

Core Insights - The US dollar ended the previous week softer, influenced by inflation signals, rising Treasury yields, and uncertainty surrounding the Federal Reserve and the White House [1] - Mixed inflation data, with Core CPI undershooting expectations and PPI meeting them, did not significantly alter the Federal Reserve's near-term policy stance [2] - The breakout in the 10-year yield above 4.2% suggests a potential increase in long-term US yields, yet the dollar struggled to gain traction due to resilient equity sentiment and reduced geopolitical fears [3] Currency Performance - The New Zealand dollar led the G10 currencies, supported by strong domestic manufacturing data, while the Canadian dollar benefited from optimism regarding renewed trade engagement with China [4] - European currencies, particularly the Euro, Swiss Franc, and Sterling, performed poorly due to political issues and declining growth momentum [4] - The Yen traded unevenly, influenced by speculation over US-Japan FX intervention and expectations of further Bank of Japan tightening, but overall demand for safe havens remained low [5] Currency Pairs Analysis - GBP/AUD has weakened significantly, with expectations for the trend to continue lower, potentially testing the key level of 1.98820 [6][8] - EUR/NZD has formed a head-and-shoulders pattern, with a baseline around 2.007; a break below this level could lead to a nearly 3% decline, testing the previous key level at 1.96225 [9][10] Market Outlook - Upcoming events, including the Davos summit and US-EU tensions over Greenland, are expected to create volatility in the Euro and Swiss Franc [11] - The acceleration of the equity earnings season, with results from major companies like Netflix and Intel, will shape risk sentiment and influence Dollar-sensitive carry trades [12] - The 10-year yield's movement above 4.2% will be closely monitored, as its trajectory could significantly impact the US dollar's performance against improving global risk appetite [13]

Core Viewpoint - The traditional logic that central bank interest rate hikes lead to currency appreciation does not apply to Japan, where the Bank of Japan raised rates twice in 2025 by a total of 50 basis points, yet the yen depreciated significantly against the USD [1][3]. Economic Indicators - Japan's current GDP is 4026 billion, with a GDP growth rate of -0.60% and an interest rate of 0.75%, which is significantly lower than the US (3.75%), China (3%), and Germany (2.15%) [2][7]. - The inflation rate in Japan stands at 2.90%, with a jobless rate of 2.60% [2][7]. Currency Dynamics - Despite the interest rate hikes, the yen remains a "funding currency," as financial institutions borrow yen at low rates and convert it to higher-yielding currencies and assets, leading to capital outflows from Japan [2][8]. - The depreciation of the yen during the Bank of Japan's rate hikes indicates that other impactful factors are influencing its value [1][3]. Future Projections - It is anticipated that the Bank of Japan will raise rates twice more in 2026, each by 25 basis points, potentially bringing the benchmark rate to 1.25% by year-end [3][9]. - With the Federal Reserve expected to cut rates by a total of 75 basis points in 2026, the interest rate differential between Japan and the US may narrow significantly, which could lead to a potential appreciation of the yen [9]. Market Sentiment - There is a prevailing view that the Bank of Japan's rate hikes may be a short-term measure due to unstable inflation, which could lead to a larger recession in Japan, contributing to the ongoing depreciation of the yen [3][9]. Market Analysis - In the short term, the USDJPY is experiencing a corrective phase, with a recent low of 157.95, showing signs of support but still facing potential downward movement [6][12].

Summary of Key Points from the Conference Call Industry Overview - The conference call focuses on the **FX swap market** and its dynamics, particularly the **FX-Sofr basis** and its implications for global liquidity and investment strategies. Core Insights and Arguments 1. **Changing Global Liquidity Outlook** - Global central banks are diverging in their balance sheet management, impacting liquidity. The Federal Reserve has ceased quantitative tightening and is increasing its balance sheet through bill purchases, while the Bank of England and Bank of Japan are reducing their pace of QT. The European Central Bank is committed to passive QT for the foreseeable future, affecting the FX swap market [1][4][7]. 2. **Decline of US Dollar Premium** - The US dollar premium in the FX swap market, measured by the FX-Sofr basis, has declined in recent years, indicating a shift in demand dynamics [2][15]. 3. **Record High FX Swap Turnover** - Daily average OTC FX swap turnover reached a record high of **USD 4.0 trillion** in April 2025, with the US dollar accounting for **USD 3.6 trillion** of this turnover, reflecting its dominance in the market [3][19][20]. 4. **Market Participants and Their Roles** - Key participants in the FX swap market include banks, dealers, institutional investors, and central banks. Banks and dealers accounted for **80%** of daily turnover, while institutional investors contributed **USD 349 billion** [27][28]. 5. **Drivers of FX-Sofr Basis** - Six main drivers of the FX-Sofr basis were identified: - Institutional investors seeking FX hedges - Regulatory requirements impacting banks' balance sheets - US bank reserves influenced by monetary policy - Bank treasuries managing liquidity needs - Reserve managers' cash deposits - Central bank US dollar swap lines providing liquidity support [4][34]. 6. **Institutional Investor Behavior** - Euro area institutional investors increased their holdings of non-euro area debt securities from **€2.6 trillion** in December 2022 to **€3.1 trillion** in September 2025, primarily driven by US securities [43]. 7. **Regulatory Impact on FX-Sofr Basis** - Basel III regulations have increased capital requirements for banks, leading to window dressing activities that typically widen the FX-Sofr basis around key reporting dates [61][66]. 8. **Central Bank Liquidity Swap Lines** - Central bank USD liquidity swap lines help alleviate strains in cross-currency funding markets, reducing widening pressures on the FX-Sofr basis during periods of increased USD demand [101][103]. Additional Important Insights - **Market Liquidity Trends** - The FX swap market is characterized by a high concentration of turnover at the very front-end of the curve, with **68%** of turnover occurring for maturities of up to seven days [29]. - **Arbitrage Opportunities** - Dealers may exploit arbitrage opportunities between different repo markets, which can influence the FX-Sofr basis depending on the relative costs of borrowing in USD versus EUR [88][90]. - **Impact of US Bank Reserves** - Changes in US bank reserves can significantly impact the availability of USD funding, with a surplus putting tightening pressure on the FX-Sofr basis and a shortage leading to widening pressure [75][76]. - **Japanese Institutional Investor Trends** - Japanese institutional investors show weak appetite for FX-hedged foreign bond investments, primarily due to a negative JPY FX-Sofr basis [48]. - **UK Institutional Investor Behavior** - UK insurance and pension funds have seen a decline in holdings of non-UK debt securities, reflecting a cautious approach amid rising yields [53][56]. This summary encapsulates the key points discussed in the conference call, providing insights into the FX swap market's dynamics, participant behaviors, and the broader implications for global liquidity and investment strategies.

Summary of Key Points from the Conference Call Industry Focus - **Foreign Exchange and Rates Strategy**: The conference call primarily discusses strategies and outlooks for foreign exchange (FX) and interest rates across various regions, particularly Asia and G10 currencies. Core Insights and Arguments 1. **USD/CNH Outlook**: The current spot reference for USD/CNH is 6.980, with expectations for potential movements in the next three months [1] 2. **Top FX Trades**: - Long CNH/KRW with a target of 216 by end-February, conviction level raised to 4/5 [2][9] - Long NZD/USD targeting 0.6000 by end-March, conviction level at 4/5 [2][16] - New long positions initiated in EUR/GBP and SGD/IDR, both with conviction levels of 3/5 [2][9] 3. **US Economic Indicators**: - December NFP report showed +50K jobs added vs. consensus of +70K, with an unemployment rate of 4.4% [4] - Upcoming US core CPI release on January 13 is anticipated to be significant, with a forecast of 0.5% m-o-m, which could influence Fed rate cut expectations [7] 4. **China's Economic Data**: - December exports are expected to show a slowdown to 3.0% y-o-y from 5.9% previously, which could impact RMB performance [8] - Positive expectations for RMB appreciation due to stable external sector conditions and reduced USD purchases by banks [18] 5. **Korean Won (KRW) Dynamics**: - Anticipated underperformance of KRW due to retail outflows into US equities and structural outflows from the Korea National Pension Service [20] 6. **Singapore Monetary Policy**: - MAS may tighten FX policy in April 2026, with a 30% chance of a slight slope increase in January [21] 7. **Indonesian Fiscal Concerns**: - Indonesia's fiscal deficit is projected to be 2.92% of GDP, raising concerns about future fiscal policy under the new administration [22][23] 8. **Taiwan's Currency Position**: - Maintaining a short USD/TWD position with a target of 29.8 by end-May 2026, supported by strong local fundamentals and global AI demand [24] Other Important Insights 1. **Market Reactions to US Tariffs**: The Supreme Court's decision on Trump's tariffs could lead to significant market reactions, with expectations of a ruling against the tariffs [4][6] 2. **NOK/SEK Trade**: Profit taken on short NOK/SEK trade due to changes in Norges Bank's FX activity, with a bullish outlook on SEK [11] 3. **JPY Weakness**: Ongoing concerns about JPY weakness amid geopolitical tensions and the need for reassurance from Japanese authorities [12] 4. **Canadian Dollar (CAD) Performance**: CAD has weakened due to falling crude oil prices and potential shifts in US oil imports [13] 5. **AUD Valuation**: AUD is considered undervalued, with a target of 0.6875 by end-March, supported by positive global sentiment [14][15] This summary encapsulates the key themes and insights from the conference call, highlighting the strategic outlook for various currencies and the macroeconomic factors influencing these positions.

Summary of Key Points from the Conference Call Industry Overview - The report focuses on the **China FX and rates markets**, tracking developments in foreign exchange and interest rates, including valuations, policy stance, technicals, flows, and fundamentals [4][5][34]. Core Insights and Arguments 1. **Economic Growth Forecast**: China's economy is projected to achieve approximately **5% year-on-year growth in 2025**, with a forecast of **4.8%** for 2026, surpassing the market consensus of **4.5%**. This outlook is based on strong exports and fiscal easing estimated at **1.2 percentage points of GDP** [4][5]. 2. **Policy Easing Approach**: The People's Bank of China (PBOC) is expected to adopt a cautious approach, focusing on medium-term growth rather than short-term cyclical issues. A lower growth target range of **4.5-5%** may indicate a higher tolerance for growth slowdown and reduced willingness for policy easing [4][5]. 3. **CNY Exchange Rate Dynamics**: The USD/CNY spot rate fell below **7.0** by the end of 2025, driven by broad USD weakness and year-end FX settlement demand. A gradual appreciation of CNY is anticipated, although a sharp appreciation could negatively impact exporters' profitability [4][5]. 4. **Interest Rate Cuts**: The PBOC is expected to implement two **10 basis points** cuts in the policy rate in 2026, reducing the **7-day OMO rate** to **1.2%** by the end of the year. This is part of a strategy to facilitate government bond issuance and manage liquidity [5][34]. 5. **Long-term CGB Yields**: Increased supply of long-term Chinese government bonds (CGBs) due to fiscal easing may lead to upward pressure on long-term yields, although weaker domestic demand could pose downside risks [5][34]. 6. **Trade Balance Improvement**: China's trade balance has improved, with a significant increase in the goods trade surplus. Travel exports reached about **200%** of 2019 levels, while travel imports were around **97%** of 2019 levels as of November 2025 [39][42]. Additional Important Insights 1. **Liquidity Management**: The PBOC has been active in liquidity management through open market operations (OMO) and repo transactions, with net liquidity injections noted in December [76][81]. 2. **Bond Issuance Trends**: Net issuance of central government bonds was approximately **RMB 335 billion** in December 2025, with local government bond issuance also showing significant activity [85][88]. 3. **Foreign Investor Activity**: Foreign investors continued to sell negotiable certificates of deposit (NCDs) in November, indicating a cautious stance towards the Chinese bond market [116]. 4. **Market Expectations**: Rising market expectations for a reserve requirement ratio (RRR) cut around the Lunar New Year holiday suggest a proactive approach to stimulate credit extension to major projects [5][34]. This summary encapsulates the key points from the conference call, highlighting the economic outlook, policy strategies, and market dynamics relevant to the China FX and rates markets.