January 2026 Monthly

[Ben Graham]

The coming year begins under the long shadow of geopolitical tensions and the unfolding of a new transformative technology, artificial intelligence—a technology that in 2025 proved both a backbone and a fault line for the U.S. economy. The resurrection of the US Monroe Doctrine, Russia's hybrid war in Europe and its aggressive campaign in Ukraine, and China's intimidation offensive against Taiwan, the Philippines, and Japan, marks a new phase in what we have suggested is a transition from globalization per se to spheres of influence. 

AI: Promises and Risks

The surge in AI-linked capital spending, particularly in data centers, buoyed U.S. equities and helped sustain GDP growth even as consumption slowed. Yet the concentration of that investment—around a few dominant firms and a handful of metro regions—raises familiar questions about sustainability. 

Market valuations assign near-limitless potential to AI productivity gains, but investors have yet to grapple with the swelling cost of power consumption, network infrastructure, and semiconductor capacity. Several utilities, once dull and defensive, now sit at the intersection of the tech and energy narratives. Electricity prices in western US states rose by double digits in 2025. That trend may strain margins in 2026 and deepen debate over whether the AI buildout resembles a modern version of past technology bubbles: transformative in the long run, but expensive and uneven in the short term. 

US Supreme Court Check? 

The U.S. administration’s new tariff regime—introduced under the guise of “resilient reindustrialization”—has already reshaped supply chains and inflation expectations. The scope of tariffs imposed in 2025 goes well beyond anything seen in at least a couple of generations. It has sparked uncertainty over presidential authority. The Supreme Court’s forthcoming decision on whether the International Emergency Economic Powers Act authorizes broad trade restrictions could redefine the boundary between executive flexibility and congressional oversight. 

Just as consequential is another pending case, on the president’s ability to dismiss members of the Federal Reserve Board. The arguments before the Supreme Court are scheduled for January 21. A ruling affirming such power would upend a century of precedent and erode the perception of central bank independence—potentially affecting everything from long-term yields to the dollar’s reserve status. The Fed’s credibility may end up tested not by inflation, but by law. 

Powell’s term as chair formally expires in May, though he has the opportunity to stay on to complete his terms as governor that extends to January 2028. His insistence on independence from the executive branch has become both institutional symbol and personal crusade. Markets seem to reward that determination. 

The Federal Reserve, the Bank of England, and Norway's Norges Bank stand out as the only G10 central banks still on an easing course in 2026, but the scope for further cuts appears limited. Core US inflation has stalled above 2%, and the global growth impulse remains modest. In contrast, many G10 peers are perceived to have completed their easing cycles. The swaps curve suggests a long pause ahead, with an increasing probability of the beginning of a tightening cycle in Australia, New Zealand, and Canada in the second half of the year. 

Beijing Disruption

The global stage remains unsettled. China’s exports have made up for the decline in shipments to the US and many countries adopting restrictions, including tariffs. Mexico’s decision in late 2025 to impose tariffs as high as 50% on goods from countries without trade agreements underscores how geopolitical logic now infuses trade design. The move appears crafted to strengthen Mexico’s hand in the scheduled USMCA review, as well as to discourage Chinese rerouting of exports through Mexican territory. 

At the same time, Beijing has reduced its reliance on imported high-tech inputs from advanced economies, choosing domestic substitutes as part of its “dual circulation” strategy. This process cushions its vulnerability and intensifies the trade imbalance with high-income countries. In its constrained fashion, the yuan surged into year-end, appreciating by 1.2% in December, its strongest advance in nearly a year-and-a-half and reaching its best level since May 2023.

Politics

Latin America looks set for heightened political attention. Elections in Brazil and Colombia, both occurring in a context of renewed U.S. interest in hemispheric affairs, will test Washington’s revived invocation of the Monroe Doctrine. Expanded U.S. engagement in the Caribbean—particularly toward Venezuela and Cuba—aims to reassert regional influence but risks charges of hypocrisy. It is harder to condemn Beijing’s or Moscow’s coercive tactics while reasserting hemispheric control, including explicit demand for Greenland. That duality could weigh on U.S. diplomatic credibility and complicate coalition-building for Western sanctions or security initiatives elsewhere. Argentina may return to the capital markets in 2026. 

Across the Atlantic, Bulgaria’s government collapsed in mid-December, but it joined the eurozone on schedule for January 1. Even with political turmoil, EU policymakers are unwilling to derail symbolic progress on integration. Still, the bloc faces new friction over global tax obligations. The U.S.—pushing for an exemption from “revenge taxes” aimed at nonparticipants—has met resistance not only from China but also European states such as the Czech Republic, Estonia, and Poland. This dispute underscores a deeper fragmentation of the rules-based order: the post-pandemic global economy is littered with partial agreements, interim arrangements, and soft commitments that depend more on political will than institutional design. 

The U.S. midterms in November will act as a referendum on economic management and governance stability. Historically, the president’s party loses seats in both chambers, and the knife-edge composition of Congress suggests that even modest shifts could affect fiscal policy, oversight of the central bank, and the trajectory of the defense budget. Asset managers and corporate treasurers alike will keep contingency plans for varying debt-ceiling dynamics and industrial policy spending depending on the outcome. 

Hungary's Orban faces what could be his most difficult challenge as he seeks a fourth consecutive term. Tiza Party's Magyar enjoys a modest lead in most polls. However, it seems idiosyncratic and cannot offset what appears to be 1) weak leadership in Germany and France, and 2) the rise of right-populist parties in the UK, Germany, and France. 

Five of Germany's 16 states hold elections in 2026 and the AfD is running ahead in the two states from the former East. The success of Italy's Meloni's government provides constructive optics, and the blurring of the center and right's immigration stance make the populist right appear less extreme. Local elections in the UK in May could test the appeal of the populist-right UK Reform Party. 

2026

Beneath these moving parts lies a deeper unease about energy, supply chain security, and digital infrastructure. The AI boom that powered much of 2025’s equity gains is inseparable from the capacity of the physical grid. Expanding data center demand, electrified transport, and green industrial policy have jointly tightened a once-stable electricity market. Power has become the new oil—strategic, scarce, and politically sensitive. That scarcity is already evident in futures pricing and regional grid investment programs. The question for 2026 is not whether the AI growth continues but whether it can do so without breaking the power system that sustains it and the financial structure that supports it. 

While many observers recognize the elevated equity prices pose a risk, there seems to be a guarded optimism. Many prognostications are optimistic for the new year. All 21 of the economists Bloomberg surveyed forecasts a further advance in the S&P 500 in 2026.  The 85% of world trade that does not involve the US is proceeding and largely in line with general rules of engagement set by the World Trade Organization. Many countries wrestle with the sheer scale of China's export dominance. We suggest that even if China were a parliamentary democracy, the size of its economy, even if it exports only around 20% of GDP, would be unsettling.  

Caveat: History whispers that turning points rarely announce themselves in advance.

Bannockburn World Currency Index 

Bannockburn's World Currency Index, a GDP-weighted basket of the currencies of the dozen largest economies rose by about 0.50% in December, its best monthly performance since August. It brought the gain for the year to around 3.7%, the largest annual gain since 2017.    

Among the G10 components, the Japanese yen was by far the weakest component. It fell by about 0.35% to narrow the year's gain to around 0.10%, despite the Bank of Japan's rate hike and signal of more to come. The Canadian and Australian dollars were among the best performers, appreciating by around 1.85% against the greenback. Sterling rose by about 1.8% and the euro finished with about a 1.3% gain in December. 

Half of the emerging market currencies in Bannockburn's World Currency Index rose in December. Encouraged by portfolio capital inflows, the South Korean won led the emerging market components and appreciated by a little less than 2%. The Mexican peso rose by about 1.6%, which brought the year's gain to 15.6%, fueled by carry trades and President Sheinbaum's ability to navigate and come out ahead (larger trade surplus with the US) the mercurial American president. 

The Chinese yuan rose to its best level since May 2023 at the end of 2025, having been given the greenlight by the PBOC's lowering of the dollar's reference rate on a trend basis. With a 1.2% gain in December, the yuan appreciated by nearly 4.5% for the year. The dollar finished the year below CNY6.99.  The Russian ruble (-2.0%) and the Brazilian real (-2.5%) were the poorest performers in the BWCI and among emerging market currencies more broadly.  And despite supportive intervention, the Indian rupee slipped by 0.50%.

Bannockburn's World Currency Index 2025 peak was in July and it trended lower through most of November. It pulled back by about 1.75% before recovering in December. At the end of the year it approached the downtrend drawn off the July and November highs.  It may consolidate in early 2026, but we anticipate a 3-4% gain over the course of the 2026, consistent with our expectation of a softer US dollar. 

U.S. Dollar:  The longest government shutdown in history disrupted the collecting and reporting of timely data. Nevertheless, there was a broad but not unanimous agreement to cut rates for the third consecutive meeting in December. The dispersion of views at the Federal Reserve is extreme but is concealed by calculation of a median projection for one cut in 2026. Eight officials see the likely need for two or more rate cuts, four pencil in one cut, four anticipate standing pat throughout the year, and three see the likely need for a hike. The market is more dovish, perhaps influenced by the prospect of a more dovish Fed Chair, though the rotation of regional president voting appears to be in a slightly more hawkish direction. President Trump is now expected to nominate a new chair by the end of January. Still, there is little chance of a cut at the late January meeting. Fed Chair Powell has suggested that the monthly nonfarm payrolls report may be exaggerated by around 60k a month. The three-month average has not been above 60k since May. At the same time, many estimates suggest the tariffs boosted the PCE deflation by 0.5%-0.7%. This combination means that the trajectory of the labor market is the key to monetary policy going forward. We suspect there is scope for two-three Fed cuts in 2026 and expect the Dollar Index to fall 8-10% over the course of the year, bringing it to 88.00-90.00 range. There is risk of another government shutdown at the end of January if Congress cannot agree on a new funding bill. 

Euro: The euro settled near $1.0355 at the end of 2024 and finished 2025 near $1.1750. The divergence of interest rate expectations seemed to be the main fuel for the euro's gains into the end of the year. We think the euro has potential to return to the 2021 highs in the $1.2260-$1.2350 area in the year ahead, and possibly $1.25. The US two-year premium over Germany narrowed to nearly 130 bp, the least since mid-2023. The ECB appears to have finished its easing cycle with the key rate at 2.0%. ECB President Christine Lagarde has suggested the neutral rate is around 1.75%. The swaps market discounts a small chance of a hike before the end of 2026, but we suspect there is a greater chance of another cut than a hike in the year ahead. The ECB itself projects slightly slower growth next year and below the 2% inflation in 2026 and 2027. Still, an extended pause is the most likely scenario. ECB will begin a transition period that begins with the end of Luis de Guindos term as vice president next year. In 2027, chief economist Philip Lane, and President Lagarde's term also end. The EU agreed joint bonds to fund a 90 bln euro loan to Ukraine that will be paid back after the war ends with Russian reparations ostensibly. The 25-year in the making trade agreement with Mercosur (Argentina, Brazil, Bolivia, Paraguay, and Uruguay) was delayed in December, and if a compromise is not found in January, it might scuttle the deal entirely. The shift from defined-contribution to defined-benefit pensions, notably in The Netherlands, can be a disruptive force but was a critical way that when adopted in the US, helped spur an equity culture. Lastly, we note the political vulnerability of German Chancellor Merz and French President Macron. Right populist parties, like the AfD in Germany and Le Pen in France are drawing support from broad dissatisfaction. 

(As of January 2, indicative closing prices, previous in parentheses) 

Spot: $1.1750 ($1.1600) Median Bloomberg One-month forecast: $1.1750 ($1.1700) One-month forward: $1.1735 ($1.1620) One-month implied vol: 5.2% (5.3%)

Japanese Yen:  The yen continued to struggle even after the Bank of Japan hiked rates in mid-December. At 0.75%, Japan's policy rate remained the second lowest among the G10 after the Switzerland's zero deposit rate. The swaps market does not have a 50% chance of the next hike discounted until the end of Q2 26, and it is not fully discounted until the end of Q3 26. However, with a rate hike delivered, the Ministry of Finance threat of intervention to counter a one-way market that it believes does not reflect fundamentals is more compelling. Still, the dollar must break below the JPY154.30-JPY154.50 area to boost confidence that a high is in place. We initially target the JPY148-JPY150 area. Many observers are concerned that higher domestic rates will discourage Japanese savers from buying foreign assets. Yet, Japan has a current account surplus of a little more than 4.5% of GDP. Despite the near doubling of Japan's 10-year yield and a dramatic narrowing of the Japanese discount and a more than 25% rally in the Nikkei, Japanese investors continued to buy foreign stocks and bonds. Foreign investors have been buying Japanese equities and bonds, and sometimes the swapping and/or hedging of the yen can yield a better return than bond itself. As the central bank continues to normalize monetary policy and reduce its balance sheet, the Bank of Japan will being reducing its equity ETF holdings but the pace will be tortoise-like with the equivalent of $2.2 bln a year (JPY330 bln) or slightly less than  $185k a month. Prime Minister Takaichi enjoys broad support, and this may tempt her to call a snap election in the lower chamber of the Diet (not required until October 2028), perhaps ahead of the June G7 summit in France. 

Spot: JPY156.85 (JPY156.20) Median Bloomberg One-month forecast: JPY155.05 (JPY150.20) One-month forward: JPY156.40 (JPY155.65). One-month implied vol: 8.1% (9.1%)

British Pound: The UK economy is struggling. The economy eked out 0.1% quarter-over-quarter growth in Q3, and the monthly GDP contracted by 0.1% in October. Year-over-year growth in Q3 was 1.3%, slightly below the eurozone's 1.4% year-over-year pace. On the other hand, consumer prices rose 3.2% year-over-year in November, while the slowest in eight months was the fastest pace among G10 countries. In a 5-4 vote, with Governor Bailey casting the deciding vote, the Bank of England cut the base rate by 25 bp in December to 3.75%. The swaps market has a 45% chance of another cut in Q1 26, and it is fully discounted by the end of Q2. Pricing is consistent with about a 60% chance of another cut in H2 26. Prime Minister Starmer, who led Labour to landslide victory in 2024, fell out of favor in 2025, and recent polls put his support at a lowly 18-22%. He seems one crisis away from a leadership challenge, especially given polls that suggest support for Farge's populist Reform UK party may have crested. Still, sterling gain of almost 7.7% in 2025 is its best annual performance since 2017. Sterling peaked on July 1 a little below $1.38. After pulling back to around $1.3150 it reached a secondary high on September 17, when the Federal Reserve delivered its first rate cut of the year, near $1.3725. The trendline connecting the two highs comes in around $1.3620 at the end of January. On the back of what we anticipate to be a broadly weaker US dollar, sterling may have potential into the $1.4000-$1.4250 area in year ahead. 

Spot: $1.3455 ($1.3235) Median Bloomberg One-month forecast: $1.3415 ($1.3300) One-month forward: $1.3460 ($1.3240) One-month implied vol: 5.9% (5.9%)

Canadian Dollar: Canada, among the most integrated into the US economy, has been hit among the hardest by the change in the US administration and the new course being charted. Through September, Canada recorded a C$28 bln merchandise trade deficit compared with a C$6.4 bln shortfall in the first ten months of 2024. At the same time that the goods deficit swelled, portfolio capital inflows declined sharply; to C$57.9 bln from C$143.75 bln. The combination of past rate cuts (100 bp in 2025 after 175 bp in 2024), and the fiscal stimulus is expected to lay the foundation for stronger economic activity in the year ahead. The swaps market thinks the Bank of Canada is done easing and has nearly an 80% chance of a hike priced in by the end of 2026. Canada recognizes that it is unlikely to reach a deal with the US, and outstanding issues, like steel, aluminum, softwood, dairy, and digital service tax will be rolled into the review of the USMCA. The Canadian dollar was a lackluster performer in 2025, appreciating by around 4.8% against the greenback. Still, it finished the year strongly and reached its best level in five months in late December. Supported by a divergence between US and Canada monetary policy, and a favorable policy mix, we anticipate additional gains for the Canadian dollar. The US dollar's low in 2025 was near CAD1.3550, and we suspect it can fall into the CAD1.27 area in the coming year. 

Spot: CAD1.3735 (CAD 1.3975) Median Bloomberg One-month forecast: CAD1.3760 (CAD1.3900) One-month forward: CAD1.3715 (CAD1.3955) One-month implied vol: 4.6% (4.2%)

Australian Dollar:  The Australian dollar reached the high for the year in late December near $0.6730. There appear to be two main drivers. First, the central bank has signaled that the easing cycle may be over. The futures market has a nearly 50% chance of a hike in Q1 26, which seems aggressive. Second, Australia has weathered the change in US trade policy better than most. Its exports to the US rose in 2025, led by beef and gold. Rising metal prices helped lift mining shares, but the ASX 200 was one of the worst equity indices among high-income countries in 2025, rising by about 7%. Australia's chief vulnerability remains that its largest trading partner is China while embedded in the US-led security alliance. Its rare earth and processing capability, however, is of increasing strategic importance. While Australia runs a trade surplus, its current account deficit is a little larger than 2% of GDP. The Reserve Bank of Australia forecasts slightly less than 2% growth in 2026 with CPI rising 3.2% in 2026. On the back of diverging monetary policy, we see potential into the $0.7000-$0.7200 area in 2026 but looked overbought at the end of 2025 after a 4.7% rally in the last 5 1/2 weeks of the year. A pullback into the $0.6575-$0.6600 area looks reasonable. 

Spot: $0.6695 ($0.6550) Median Bloomberg One-month forecast: $0.6695 ($0.6625) One-month forward: $0.6700 ($0.6555) One-month implied vol: 7.6% (7.4%). 

Mexican Peso:  With around a 15.6% gain in 2025, the Mexican peso was one of the strongest currencies in the world. It rose by nearly 1.8% in December to reach its best level since July 2024 (the dollar fell to almost MXN17.88). Its attractive carry, despite interest rate cuts, relatively low volatility, and comparative political stability underpin its attractiveness. The minimum wage was increased by 13% to start 2026, bringing the adjusted to over 150% since 2018. The minimum wage in border zones is almost 40% higher. President Sheinbaum is also committed to reducing the workweek from 48 hours to 40 by 2030. A new tariff regime was announced in late 2025, aimed at China and countries that export Chinese made goods brings Mexico more into line with the US, and signaling its intention to remain closely tied to the US. The government estimates that the new tariffs impact about 8% of its trade and could lift CPI by a modest 0.2%, while boosting revenue by MXN30 bln (~$1.7 bln). After 12 consecutive rate cuts, and headline inflation slightly below the top end of the 2%-4% band, the central bank signaled a likely extended pause. It does not meet next until February 5. The swaps market is discounting one more cut to 6.75%. W have a modestly constructive outlook for peso in the year ahead (MXN17.40-MXN17.60), in contrast to the median forecast in Bloomberg's survey, which puts the dollar at MXN18.50 at the end of 2026.

Spot: MXN17.9040 (MXN18.2955) Median Bloomberg One-month forecast: MXN18.0620 (MXN18.4940) One-month forward: MXN17.9570 (MXN18.3550) One-month implied vol: 6.8% (7.1%)

Chinese Yuan:  Chinese officials who closely manage the exchange rate, allowed modest appreciation of the yuan in 2025. The PBOC lowered the dollar's reference rate on a trend basis since mid-April, from around CNY7.21 to almost below CNY7.03. Still, the exchange rate movement has been modest in the context of its undervaluation, the large trade surplus, and the broader decline of the dollar. The onshore yuan appreciated by about 4.5% and the offshore yuan rose around 5.2%. Among the G10 currencies, only the Japanese yen, and the Canadian and New Zealand dollar appreciated by less. Most emerging market currencies also appreciated more than the yuan. With consumer prices emerging from deflation and the broader backlash against China's imbalanced trade, Beijing appears to recognize the benefits of a modestly stronger currency. While the market (Bloomberg survey) sees limited scope for the dollar below CNY7.00, we see potential toward CNY6.80-CNY6.85. Between the continued drag from the property market and the anti-involution campaign, the economy struggles to find traction, though December's PMIs rose. We anticipate easier monetary policy, which could include a small rate cut and a reduction in reserve requirements in the first part of the new year. While China's rare earth exports have increased, Beijing implemented new export controls on silver (January 1), which rose by nearly 150% last year. The trade truce with the US ends in November 2026. Lastly, notions that an authoritarian regime like China cannot innovate are being laid to rest with its surge in patents and reports at the end of 2025 that China has developed ultraviolet lithography capability to make advanced semiconductor chips and appears to be achieving technological breakthroughs in numerous domains. 

Spot: CNY6.9880 (CNY7.0740) Median Bloomberg One-month forecast: CNY7.0095 (CNY7.0990) One-month forward: CNY6.9970 (CNY7.0520) One-month implied vol: 3.1% (2.4%)

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