March seems to be more about the unfolding of current forces driving the capital markets, rather than new forces or policies. All the G10 central banks but the Reserve Bank of New Zealand meet in March, and none are likely to change policy.
China formalizes its next Five-Year Plan. In the US, the Supreme Court's ruling that the president's use of emergency powers to levy widespread tariffs is not legal was not unexpected and the administration's "Plan B" is gradually being unveiled. The UK government faces an early electoral test. Japan has already shown how quickly crowded trades unwind when the political narrative shifts. The political cycle is no longer background noise. It is part of the macro regime.
China: Resilience as Strategy
The National People’s Congress will translate party guidance into the 2026–2030 Five-Year Plan. The themes are familiar: innovation, technological self-reliance, green development, supply-chain security. What has changed is emphasis. Resilience now stands alongside growth. National security is embedded in economic planning.
Expect multi-year support for semiconductors, AI, advanced manufacturing, and green technologies. “Dual circulation” remains the framework: strengthen domestic demand and indigenous capability while maintaining external ties that serve national objectives.
For markets, three implications follow. First, industrial policy is structural. Subsidies, directed lending, and procurement policy are long-term commitments, not cyclical levers. Second, foreign firms in sensitive sectors face higher regulatory and political hurdles. Access is increasingly conditional.
Third, trade friction is hardwired into the system. Even absent new sanctions or tariffs, subsidy regimes and security controls keep tensions elevated. China is not retreating from global trade. It is reshaping it around strategic autonomy. “Business as usual” is fading as a baseline assumption.
United States: The Creaky Tariff Floor
“Liberation Day” implied peak effective tariffs near 28%, up from roughly 3% at the start of 2025. Since then, pauses, carve-outs, and substitutions have lowered the realized burden. Effective rates appeared to be around 12-14%. That is still the highest sustained level since the 1930s.
The Supreme Court ruled against the administration's use of emergency powers to levy most of the tariffs. While many expected the court's decision, reports suggested that some businesses sold their refund rights to hedge funds and non-bank financial institutions. The court sent the issue of refunds back to the lower courts. Shortly after the decision was announced, President Trump unveiled Plan B: A 10% across the board tariff under Section 122 of the Trade Act of 1974 to address for balance-of-payments problems. Without Congressional support, the tariffs, the president's authority is limited to 150 days.
The following day, Saturday February 21, President Trump raise the general levy to 15%. The legality may be challenged. On one level the US does not have a balance of payment problem. Under floating exchange rates, the current account is offset by the capital account in the balance of payments. Rather than the adjustment made by transferring gold, the adjustment is made by capital flows to offset the broad trade deficit.
We suspect the deterioration of the US net international investment position would pass the legal muster, and it would take more than 150 days to exhaust a legal challenge. And it is not clear in the first place that the judiciary will challenge the executive claim of an emergency. The Supreme Court's ruling on the tariffs implement under the International Emergency Economic Powers Act did not challenge the emergency status but the power to tariff under it. Most of the other tariff authority will require the administration to work with Congress, but the Republican majorities are narrow and, there is little room for dissent in the ranks.
Then there is monetary policy. With the investigation into the Federal Reserve continuing, the confirmation process for Kevin Warsh may be delayed but if all goes according to plan, the meeting he chairs will be in June, and the Fed funds futures market has a strong chance of a cut then.
We suspect that a Warsh-led Federal Reserve will allow the administration to pursue two other transformative policies and will take some time to unfold. First, there is already speculation about a new Federal Reserve-US Treasury accord, which in some ways reverses the prevailing one from the early 1950s that recognized greater operational independence for the central bank.
Second, there may be an attempt to revalue gold, which is being carried at about $42.20 a troy ounce. In theory, it seems reasonable. However, setting such a volatile commodity at or near market prices does not seem prudent. And some decision-making rules to address re-valuation or de-valuation should also be part of the decision. The Treasury would present new gold certificates to the Federal Reserve, which would credit the Treasury's account accordingly.
United Kingdom: Political Premium Returns
The UK has two vulnerabilities: Politics and economics.
Prime Minister Starmer faces May local elections that will be read as an early referendum on fiscal restraint and incremental reform. Real incomes remain pressured. Public services are strained. Patience is finite.
Within the Labour Party, Starmer's challengers are on the left. The Greens carried the Gorton and Denton special election at the end of February. Poor results in the May elections the polls could strengthen the leftwing of the Labour Party's hand. If trying to outflank the UK Reform Party did not work, maybe product differential could. However, the markets may object and could take in out on the Gilts and sterling.
The UK economy ended 2025 will little forward momentum. The economy expanded by 0.1% quarter-over-quarter in Q4 25. Unemployment reached 5.2% in the quarter, the highest since the pandemic. Regular private sector wage growth slowed to 3.4%, the slowest in over five years.
Japan: Crowded Trades Break Fast
Japan offered a reminder that positioning matters as much as policy.
Sanae Takaichi’s snap-election victory delivered the LDP its largest majority since World War II. The platform blended fiscal support with medium-term consolidation and a cautious approach to BOJ normalization. It was continuity with a stronger mandate.
Going into the vote, the consensus was clear: looser fiscal policy, gradual BOJ tightening, weaker yen, higher JGB yields. The trade was crowded.
When uncertainty evaporated and post-election messaging leaned toward sustainability, markets reversed sharply. The yen rallied. Long-dated JGB yields fell as shorts were squeezed. The one-way weak yen narrative cracked.
The lesson is broader than Japan. When a trade becomes a proxy for a global regime assumption—in this case, that Japan would tolerate persistent depreciation—it becomes vulnerable to even modest political shifts.
Politics is not interfering with fundamentals. It is a fundamental.
Bannockburn's World Currency Index
Bannockburn's World Currency Index, a GDP-weighted basket of the currencies of the dozen largest economies, rose the fourth consecutive month. It eked out a minor gain of about 0.15% after the nearly 1% gain in January. It looks poised to move higher, consistent with additional dollar losses.
All of the G10 components but the Australian dollar fell against the greenback in February. Encouraged by a hawkish Reserve Bank of Australia, the Australian dollar gained a little more than 2.1% in February. Sterling was the weakest. It tumbled about 1.5%. The yen lost a little more than half as much.
Emerging market currencies in Bannockburn's World Currency Index rose in February, with the noted exception of the Russian ruble, which fell almost 1.6%. The Brazilian real's nearly 2.7% gain was the strongest component in the BWCI last month followed the Chinese yuan rose for the eighth consecutive month, and its nearly 1.4% gain put it slightly ahead of the Mexican peso's 1.35% appreciation. The Indian rupee's 1.1% gain was its largest since last April. The South Korean won was slightly better than flat.
Bannockburn's World Currency Index reached its best level since September 2024, around 92.25 in mid-February before consolidating. The consolidation looks broadly constructive, and we expect it to continue to trend higher. At the end of last year, we projected potential toward 94.75-96.00 this year, a roughly 5-7% gain, reflecting our bearish US dollar view. That still seems broadly fair.
U.S. Dollar: The Dollar Index fell to four-year lows in late January, near 95.50. It recovered in February and stalled around 98.00. This met the technical retracement objectives, and the risk is a return to the February low, about 96.50. A break re-targets the January low. Sentiment towards the dollar remains fragile, and the preferences revealed by the administration's policies are consistent with a weaker dollar. Still contrary to the "sell America" mantra in the media, the Treasury's International Capital report that foreign investors were net buyers of $1.35 trillion of US stocks and bonds in 2025, the most since 2022. Yet, studies suggest that the dollar exposure was hedged. Comments from numerous Fed officials have encouraged the market to push back the first cut until July. At the end of January, the Fed funds futures strip implied an almost 87% chance of a cut in June, which could be the first meeting Warsh chairs if the confirmation process were timely. It is being threatened by the ongoing investigation into the Fed's renovations of its headquarters. By the end of February, the odds slipped to about 63%. The futures market has about 60 bp of easing discounted for this year, up from 53 bp at the end of January. The March 17-18 FOMC meeting will see updated projections. In December, the median dot, which hid a wide dispersion of view, anticipated one cut this year.
Euro: After it appreciated more than 4.5-cents in the second half of January, the euro pulled back and consolidated for most of February. A base appears to have been forged in the $1.1745-65 area. It looks poised to move higher in March after violating the month-long down trendline. Initial potential may extend back to the $1.1900-50 area in the coming weeks. Eurozone growth looks stable even if not inspiring. Infrastructure and defense spending will contribute. The ECB meets on March 19. There is practically doubt that policy is on hold. The new economic projections are likely to be little changed with the central bank anticipating inflation will hold below the 2% target this year and next. Speculation surfaced that ECB President Lagarde may step down before her term ends (October 27). She seems to have denied this but, in any case, it is not imminent. Two German states hold elections in March. Baden-Wurttemberg's contest will be held on March 6. The Greens won in 2021 and formed a coalition with the CDU. The CDU is running a little ahead in the polls, and CDU-Green coalition looks to be the most likely outcome. Rhineland-Palatinate hold their election on March 22. The polls suggest a CDU-SPD coalition may replace the current SPD-Greens-FDP tie-up. Denmark has called for a snap election on March 24, ostensibly to secure a stronger mandate to resist US pressure on Greenland.
(As of February 27, indicative closing prices, previous in parentheses)
Japanese Yen: The yen looks vulnerable. The two new nominations to the central bank board confirm the market's understanding Prime Minister Takaichi wants an accommodative monetary policy in the face of the fiscal stimulus. At the same time, the BOJ's reluctance to tighten more aggressively pre-dates the ascendance of Takaichi. Core CPI peaked last May at 3.7%. In January, the latest print was at 2.0%, matching the slowest pace since March 2022. The economy practically ground to a halt last year. Q4 25 growth year-over-year was a meager 0.1%. Growth appears to be off to a stronger start this year. Still, the swaps markets see practically no chance of a hike at the March 19 BOJ meeting. A hike at the start of the new fiscal year in April seems reasonable. However, the risk of intervention has slackened, and the market appears eager to test official resolve. A return to the JPY158-JPY159 area in the coming weeks looks reasonable.
British Pound: Sterling was the weakest of the G10 currencies in February. It fell by about 1.7% against the dollar and 1.3% against the euro. The generally poor string of economic data, outside of retail sales, saw the pendulum of market sentiment swing toward a cut as soon as the March 19 Bank of England meeting. In the swaps market, the odds of a cut rose to nearly 80% from less than 20% at the end of January. The market has another cut fully discounted in H2, which would bring the base rate to 3.25%. The selling pressure on sterling does not appear exhausted. We suspect there is potential toward $1.3250-$1.3300 in the coming weeks. A rare piece of favorable news for the Gilt market may come after Chancellor Reeve's spring statement in early March. The Debt Management Office may announce a GBP59 bln (20%) decline in gross Gilt sales during the new fiscal year. Near GBP245 bln, it would be the least gross sales in three years.
Canadian Dollar: For the first time in four months, the Canadian dollar fell against the US dollar in February. The losses were minor (~0.35%). Its prospects look better in March. The US dollar stalled in the CAD1.3700-CAD1.3725 area last month. We suspect there is potential back toward the lower end of the recent range (CAD1.3480-CAD1.3500). While the economy has yet to find even keel, the 0.6% annualized contraction in Q4 25 overstates the weakness. Inventories were drawn down aggressively and slashed 4.2 percentage points off the headline pace. The trade balance improved and the domestic private sector expanded. Despite weakness in house prices, household spending rose 1.7% (after falling 0.8% in Q3) at an annual pace. With price pressures still firm, the Bank of Canada is still very much on the sidelines. The USMCA continues to offer protection for Canada, but the USMCA review starting around midyear poses risks. At the same time, Canada is gradually diversifying its export markets away from the US.
Australian Dollar: Profit-taking after the Reserve Bank of Australia hiked its cash rate target on February 3 saw the Australian dollar test our downside objective of $0.6900. It did not stay there long. Within a little more than a week, it reached nearly $0.7150, a three-year high. The firm inflation readings and strength in the labor market suggest hawkish guidance at the March 17 central bank meeting, paving the ground for a hike at the following meeting in early May. Monetary policy divergence, and Australia's commodity exposure, including critical materials underpin the Australian dollar's attractiveness. The Australian dollar's nearly 2.1% gain in February led the G10 currency complex and brought the year-to-date gain to 6.5%. We initially thought potential toward $0.7200 this year seemed reasonable. Though more bullish than the consensus forecast, it is likely to prove too conservative. It may overshoot it in the coming weeks, but we are hesitant to recommend chasing as much good news appears already discounted. A 1-2 cent pullback may provide a better opportunity for those that can afford to be patient.
Mexican Peso: Last month, the dollar fell to a new low against the peso since June 2024, near MXN17.0865, but only after first slightly overshooting our upside corrective target (MXN17.50-55). The main forces that have lifted the peso by more than 4.5% in January-February remain intact. The yield pick up and relatively modest volatility, with 24-hour activity, it is attractive for dollar-based investors. Still, we recognize a regional theme as five of the top eight performing emerging market currencies this year are from Latam. High rate and commodity exposure are a shared feature. While the dramatic shift in US policy was disruptive for Mexico, its exports to the US rose in 2025 and it remained the largest US trading partner for the third consecutive year. We suspect the market may be reluctant to take the dollar below the psychologically important MXN17.00 level while US President Trump continues to threaten leaving the USMCA. Mexico's central bank meets on March 26, and the extended pause is set to continue until at least closer to midyear. On the other hand, Brazil's central bank has signaled it will deliver its first rate cut at the March 18 meeting. The Selic rate is currently at 15%. Colombia's central bank meets at the end of March and is expected to hike 25 bp (to 10.50%).
Chinese Yuan: Since the end of 2024, Beijing has allowed the yuan too gradually strengthen against the US dollar. Last year, the yuan appreciated in nine of the 12 months. It appreciated further in January and February this year to extend the streak to nine consecutive months of gains. It appreciated by almost 2% against the US dollar. It has appreciated by another 1.2% this year. The pace is too slow for Chinese critics, but the direction is clear. A stronger exchange rate achieves at least three policy objectives. First, on the margins it may deflect some criticism over its huge trade surplus. Second, an appreciating currency is conducive for a foreign direct investment expansion strategy that is increasingly adopted by Chinese companies. Third, allowing the yuan to appreciate may also foster its greater use as an international currency. That said, the exchange rate target by Chinese officials is not known, and market participants need to stay vigilant, watching for cues. The PBOC announced two measures at the end of February that may steady the yuan in the short term, though we suspect it will continue to allow a gradual appreciation of the yuan. The central bank cut the required reserves for foreign exchange forwards, which makes them more attractive. It also boosted Chinese banks’ ability to provide yuan liquidity offshore.
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March seems to be more about the unfolding of current forces driving the capital markets, rather than new forces or policies. All the G10 central banks but the Reserve Bank of New Zealand meet in March, and none are likely to change policy.
China formalizes its next Five-Year Plan. In the US, the Supreme Court's ruling that the president's use of emergency powers to levy widespread tariffs is not legal was not unexpected and the administration's "Plan B" is gradually being unveiled. The UK government faces an early electoral test. Japan has already shown how quickly crowded trades unwind when the political narrative shifts. The political cycle is no longer background noise. It is part of the macro regime.
China: Resilience as Strategy
The National People’s Congress will translate party guidance into the 2026–2030 Five-Year Plan. The themes are familiar: innovation, technological self-reliance, green development, supply-chain security. What has changed is emphasis. Resilience now stands alongside growth. National security is embedded in economic planning.
Expect multi-year support for semiconductors, AI, advanced manufacturing, and green technologies. “Dual circulation” remains the framework: strengthen domestic demand and indigenous capability while maintaining external ties that serve national objectives.
For markets, three implications follow. First, industrial policy is structural. Subsidies, directed lending, and procurement policy are long-term commitments, not cyclical levers. Second, foreign firms in sensitive sectors face higher regulatory and political hurdles. Access is increasingly conditional.
Third, trade friction is hardwired into the system. Even absent new sanctions or tariffs, subsidy regimes and security controls keep tensions elevated. China is not retreating from global trade. It is reshaping it around strategic autonomy. “Business as usual” is fading as a baseline assumption.
United States: The Creaky Tariff Floor
“Liberation Day” implied peak effective tariffs near 28%, up from roughly 3% at the start of 2025. Since then, pauses, carve-outs, and substitutions have lowered the realized burden. Effective rates appeared to be around 12-14%. That is still the highest sustained level since the 1930s.
The Supreme Court ruled against the administration's use of emergency powers to levy most of the tariffs. While many expected the court's decision, reports suggested that some businesses sold their refund rights to hedge funds and non-bank financial institutions. The court sent the issue of refunds back to the lower courts. Shortly after the decision was announced, President Trump unveiled Plan B: A 10% across the board tariff under Section 122 of the Trade Act of 1974 to address for balance-of-payments problems. Without Congressional support, the tariffs, the president's authority is limited to 150 days.
The following day, Saturday February 21, President Trump raise the general levy to 15%. The legality may be challenged. On one level the US does not have a balance of payment problem. Under floating exchange rates, the current account is offset by the capital account in the balance of payments. Rather than the adjustment made by transferring gold, the adjustment is made by capital flows to offset the broad trade deficit.
We suspect the deterioration of the US net international investment position would pass the legal muster, and it would take more than 150 days to exhaust a legal challenge. And it is not clear in the first place that the judiciary will challenge the executive claim of an emergency. The Supreme Court's ruling on the tariffs implement under the International Emergency Economic Powers Act did not challenge the emergency status but the power to tariff under it. Most of the other tariff authority will require the administration to work with Congress, but the Republican majorities are narrow and, there is little room for dissent in the ranks.
Then there is monetary policy. With the investigation into the Federal Reserve continuing, the confirmation process for Kevin Warsh may be delayed but if all goes according to plan, the meeting he chairs will be in June, and the Fed funds futures market has a strong chance of a cut then.
We suspect that a Warsh-led Federal Reserve will allow the administration to pursue two other transformative policies and will take some time to unfold. First, there is already speculation about a new Federal Reserve-US Treasury accord, which in some ways reverses the prevailing one from the early 1950s that recognized greater operational independence for the central bank.
Second, there may be an attempt to revalue gold, which is being carried at about $42.20 a troy ounce. In theory, it seems reasonable. However, setting such a volatile commodity at or near market prices does not seem prudent. And some decision-making rules to address re-valuation or de-valuation should also be part of the decision. The Treasury would present new gold certificates to the Federal Reserve, which would credit the Treasury's account accordingly.
United Kingdom: Political Premium Returns
The UK has two vulnerabilities: Politics and economics.
Prime Minister Starmer faces May local elections that will be read as an early referendum on fiscal restraint and incremental reform. Real incomes remain pressured. Public services are strained. Patience is finite.
Within the Labour Party, Starmer's challengers are on the left. The Greens carried the Gorton and Denton special election at the end of February. Poor results in the May elections the polls could strengthen the leftwing of the Labour Party's hand. If trying to outflank the UK Reform Party did not work, maybe product differential could. However, the markets may object and could take in out on the Gilts and sterling.
The UK economy ended 2025 will little forward momentum. The economy expanded by 0.1% quarter-over-quarter in Q4 25. Unemployment reached 5.2% in the quarter, the highest since the pandemic. Regular private sector wage growth slowed to 3.4%, the slowest in over five years.
Japan: Crowded Trades Break Fast
Japan offered a reminder that positioning matters as much as policy.
Sanae Takaichi’s snap-election victory delivered the LDP its largest majority since World War II. The platform blended fiscal support with medium-term consolidation and a cautious approach to BOJ normalization. It was continuity with a stronger mandate.
Going into the vote, the consensus was clear: looser fiscal policy, gradual BOJ tightening, weaker yen, higher JGB yields. The trade was crowded.
When uncertainty evaporated and post-election messaging leaned toward sustainability, markets reversed sharply. The yen rallied. Long-dated JGB yields fell as shorts were squeezed. The one-way weak yen narrative cracked.
The lesson is broader than Japan. When a trade becomes a proxy for a global regime assumption—in this case, that Japan would tolerate persistent depreciation—it becomes vulnerable to even modest political shifts.
Politics is not interfering with fundamentals. It is a fundamental.
Bannockburn's World Currency Index
Bannockburn's World Currency Index, a GDP-weighted basket of the currencies of the dozen largest economies, rose the fourth consecutive month. It eked out a minor gain of about 0.15% after the nearly 1% gain in January. It looks poised to move higher, consistent with additional dollar losses.
All of the G10 components but the Australian dollar fell against the greenback in February. Encouraged by a hawkish Reserve Bank of Australia, the Australian dollar gained a little more than 2.1% in February. Sterling was the weakest. It tumbled about 1.5%. The yen lost a little more than half as much.
Emerging market currencies in Bannockburn's World Currency Index rose in February, with the noted exception of the Russian ruble, which fell almost 1.6%. The Brazilian real's nearly 2.7% gain was the strongest component in the BWCI last month followed the Chinese yuan rose for the eighth consecutive month, and its nearly 1.4% gain put it slightly ahead of the Mexican peso's 1.35% appreciation. The Indian rupee's 1.1% gain was its largest since last April. The South Korean won was slightly better than flat.
Bannockburn's World Currency Index reached its best level since September 2024, around 92.25 in mid-February before consolidating. The consolidation looks broadly constructive, and we expect it to continue to trend higher. At the end of last year, we projected potential toward 94.75-96.00 this year, a roughly 5-7% gain, reflecting our bearish US dollar view. That still seems broadly fair.
U.S. Dollar: The Dollar Index fell to four-year lows in late January, near 95.50. It recovered in February and stalled around 98.00. This met the technical retracement objectives, and the risk is a return to the February low, about 96.50. A break re-targets the January low. Sentiment towards the dollar remains fragile, and the preferences revealed by the administration's policies are consistent with a weaker dollar. Still contrary to the "sell America" mantra in the media, the Treasury's International Capital report that foreign investors were net buyers of $1.35 trillion of US stocks and bonds in 2025, the most since 2022. Yet, studies suggest that the dollar exposure was hedged. Comments from numerous Fed officials have encouraged the market to push back the first cut until July. At the end of January, the Fed funds futures strip implied an almost 87% chance of a cut in June, which could be the first meeting Warsh chairs if the confirmation process were timely. It is being threatened by the ongoing investigation into the Fed's renovations of its headquarters. By the end of February, the odds slipped to about 63%. The futures market has about 60 bp of easing discounted for this year, up from 53 bp at the end of January. The March 17-18 FOMC meeting will see updated projections. In December, the median dot, which hid a wide dispersion of view, anticipated one cut this year.
Euro: After it appreciated more than 4.5-cents in the second half of January, the euro pulled back and consolidated for most of February. A base appears to have been forged in the $1.1745-65 area. It looks poised to move higher in March after violating the month-long down trendline. Initial potential may extend back to the $1.1900-50 area in the coming weeks. Eurozone growth looks stable even if not inspiring. Infrastructure and defense spending will contribute. The ECB meets on March 19. There is practically doubt that policy is on hold. The new economic projections are likely to be little changed with the central bank anticipating inflation will hold below the 2% target this year and next. Speculation surfaced that ECB President Lagarde may step down before her term ends (October 27). She seems to have denied this but, in any case, it is not imminent. Two German states hold elections in March. Baden-Wurttemberg's contest will be held on March 6. The Greens won in 2021 and formed a coalition with the CDU. The CDU is running a little ahead in the polls, and CDU-Green coalition looks to be the most likely outcome. Rhineland-Palatinate hold their election on March 22. The polls suggest a CDU-SPD coalition may replace the current SPD-Greens-FDP tie-up. Denmark has called for a snap election on March 24, ostensibly to secure a stronger mandate to resist US pressure on Greenland.
(As of February 27, indicative closing prices, previous in parentheses)
Spot: $1.1812 ($1.1850) Median Bloomberg One-month forecast: $1.1900 ($1.1827) One-month forward: $1.1832 ($1.1867) One-month implied vol: 5.9% (7.3%)
Japanese Yen: The yen looks vulnerable. The two new nominations to the central bank board confirm the market's understanding Prime Minister Takaichi wants an accommodative monetary policy in the face of the fiscal stimulus. At the same time, the BOJ's reluctance to tighten more aggressively pre-dates the ascendance of Takaichi. Core CPI peaked last May at 3.7%. In January, the latest print was at 2.0%, matching the slowest pace since March 2022. The economy practically ground to a halt last year. Q4 25 growth year-over-year was a meager 0.1%. Growth appears to be off to a stronger start this year. Still, the swaps markets see practically no chance of a hike at the March 19 BOJ meeting. A hike at the start of the new fiscal year in April seems reasonable. However, the risk of intervention has slackened, and the market appears eager to test official resolve. A return to the JPY158-JPY159 area in the coming weeks looks reasonable.
Spot: JPY156.05 (JPY154.80) Median Bloomberg One-month forecast: JPY154.00 (JPY154.40) One-month forward: JPY155.65 (JPY154.40). One-month implied vol: 9.2% (9.9%)
British Pound: Sterling was the weakest of the G10 currencies in February. It fell by about 1.7% against the dollar and 1.3% against the euro. The generally poor string of economic data, outside of retail sales, saw the pendulum of market sentiment swing toward a cut as soon as the March 19 Bank of England meeting. In the swaps market, the odds of a cut rose to nearly 80% from less than 20% at the end of January. The market has another cut fully discounted in H2, which would bring the base rate to 3.25%. The selling pressure on sterling does not appear exhausted. We suspect there is potential toward $1.3250-$1.3300 in the coming weeks. A rare piece of favorable news for the Gilt market may come after Chancellor Reeve's spring statement in early March. The Debt Management Office may announce a GBP59 bln (20%) decline in gross Gilt sales during the new fiscal year. Near GBP245 bln, it would be the least gross sales in three years.
Spot: $1.3482 ($1.3865) Median Bloomberg One-month forecast: $1.3600 ($1.3600) One-month forward: $1.3480 ($1.3585) One-month implied vol: 7.2% (7.3%)
Canadian Dollar: For the first time in four months, the Canadian dollar fell against the US dollar in February. The losses were minor (~0.35%). Its prospects look better in March. The US dollar stalled in the CAD1.3700-CAD1.3725 area last month. We suspect there is potential back toward the lower end of the recent range (CAD1.3480-CAD1.3500). While the economy has yet to find even keel, the 0.6% annualized contraction in Q4 25 overstates the weakness. Inventories were drawn down aggressively and slashed 4.2 percentage points off the headline pace. The trade balance improved and the domestic private sector expanded. Despite weakness in house prices, household spending rose 1.7% (after falling 0.8% in Q3) at an annual pace. With price pressures still firm, the Bank of Canada is still very much on the sidelines. The USMCA continues to offer protection for Canada, but the USMCA review starting around midyear poses risks. At the same time, Canada is gradually diversifying its export markets away from the US.
Spot: CAD1.3650 (CAD 1.3620) Median Bloomberg One-month forecast: CAD1.3700 (CAD1.3800) One-month forward: CAD1.3630 (CAD1.3585) One-month implied vol: 4.9% (6.1%)
Australian Dollar: Profit-taking after the Reserve Bank of Australia hiked its cash rate target on February 3 saw the Australian dollar test our downside objective of $0.6900. It did not stay there long. Within a little more than a week, it reached nearly $0.7150, a three-year high. The firm inflation readings and strength in the labor market suggest hawkish guidance at the March 17 central bank meeting, paving the ground for a hike at the following meeting in early May. Monetary policy divergence, and Australia's commodity exposure, including critical materials underpin the Australian dollar's attractiveness. The Australian dollar's nearly 2.1% gain in February led the G10 currency complex and brought the year-to-date gain to 6.5%. We initially thought potential toward $0.7200 this year seemed reasonable. Though more bullish than the consensus forecast, it is likely to prove too conservative. It may overshoot it in the coming weeks, but we are hesitant to recommend chasing as much good news appears already discounted. A 1-2 cent pullback may provide a better opportunity for those that can afford to be patient.
Spot: $0.7118 ($0.6695) Median Bloomberg One-month forecast: $0.7000 ($0.6700) One-month forward: $0.7120 ($0.6970) One-month implied vol: 9.3% (10.5%).
Mexican Peso: Last month, the dollar fell to a new low against the peso since June 2024, near MXN17.0865, but only after first slightly overshooting our upside corrective target (MXN17.50-55). The main forces that have lifted the peso by more than 4.5% in January-February remain intact. The yield pick up and relatively modest volatility, with 24-hour activity, it is attractive for dollar-based investors. Still, we recognize a regional theme as five of the top eight performing emerging market currencies this year are from Latam. High rate and commodity exposure are a shared feature. While the dramatic shift in US policy was disruptive for Mexico, its exports to the US rose in 2025 and it remained the largest US trading partner for the third consecutive year. We suspect the market may be reluctant to take the dollar below the psychologically important MXN17.00 level while US President Trump continues to threaten leaving the USMCA. Mexico's central bank meets on March 26, and the extended pause is set to continue until at least closer to midyear. On the other hand, Brazil's central bank has signaled it will deliver its first rate cut at the March 18 meeting. The Selic rate is currently at 15%. Colombia's central bank meets at the end of March and is expected to hike 25 bp (to 10.50%).
Spot: MXN17.2270 (MXN17.4605) Median Bloomberg One-month forecast: MXN17.60 (MXN17.8685) One-month forward: MXN17.2765 (MXN17.5040) One-month implied vol: 9.2% (9.5%)
Chinese Yuan: Since the end of 2024, Beijing has allowed the yuan too gradually strengthen against the US dollar. Last year, the yuan appreciated in nine of the 12 months. It appreciated further in January and February this year to extend the streak to nine consecutive months of gains. It appreciated by almost 2% against the US dollar. It has appreciated by another 1.2% this year. The pace is too slow for Chinese critics, but the direction is clear. A stronger exchange rate achieves at least three policy objectives. First, on the margins it may deflect some criticism over its huge trade surplus. Second, an appreciating currency is conducive for a foreign direct investment expansion strategy that is increasingly adopted by Chinese companies. Third, allowing the yuan to appreciate may also foster its greater use as an international currency. That said, the exchange rate target by Chinese officials is not known, and market participants need to stay vigilant, watching for cues. The PBOC announced two measures at the end of February that may steady the yuan in the short term, though we suspect it will continue to allow a gradual appreciation of the yuan. The central bank cut the required reserves for foreign exchange forwards, which makes them more attractive. It also boosted Chinese banks’ ability to provide yuan liquidity offshore.
Spot: CNY6.8620 (CNY6.9570) Median Bloomberg One-month forecast: CNY6.9250 (CNY6.9535) One-month forward: CNY6.8830 (CNY6.9625) One-month implied vol: 3.4% (4.7%)
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