FX Daily: De-Dollarisation Trend Remains Elusive

Image Source: UnsplashBetter US data has seen US rates and the dollar tick a little higher this week. The attack on Powell's Fed has had no impact on the dollar so far, and US November TIC data released last night showed that foreigners were still very happy to pour money into US portfolio assets late last year. The case against the dollar remains hard workUSD: Holding steady The dollar is drifting higher this week on probably what is best described as a macro move. US data has come in on the firmer side, e.g. retail sales and jobless claims, while the Fed's Beige Book presented a view of a gently expanding economy and no immediate threat to the jobs market. Investors have reacted by marking the Fed terminal rate for the easing cycle some 5bp higher this week. That's a 32bp re-rating from the lows seen last October. In response, DXY is edging higher in a very low volatility manner.On a quiet Friday, it is worth talking about the release last night of US Treasury TIC data for November. Our rate colleagues discuss the bond activity here. The main takeaway is that foreigners continue to pour money into US asset markets. The TIC release is a volatile data set, but looking at the rolling 12-month average, in November the net foreign purchase of US assets was around $100bn per month – compared to around $25bn in the summer of 2024. November's data was notable for strong flows into equities. Around 45% of the large private sector inflow was in equities. And even the foreign official sector bought $23bn of equities. Yes, it looks like the BRICS official grouping is still offloading Treasuries, but these flows are being dwarfed by the private sector.We would again conclude that de-dollarisation is going to take some time and that if the dollar is to come lower this year, it will be driven by lower US rates and increased foreign hedging of US assets.The data calendar is relatively quiet today, and there seems to be no reason to argue with a gently bid dollar. One possible threat to the dollar over the next couple of weeks could come from heavy intervention to sell both USD/JPY and USD/KRW near 160 and 1500 respectively. The US Treasury is sounding supportive of such activity.Above 99.45/50, DXY can probably continue to grind towards 100.Chris TurnerEUR: Used as a funding currency for carry One-month traded EUR/USD volatility continues to languish near 5%. And most are concluding that EUR/USD looks pretty range-bound in the near term. With volatility low, and high-yield and emerging market currencies in demand, it seems investors are preferring to fund carry trades out of the euro at a cost of just 2.00% (using the one-month implied yield) rather than dollars at around 3.55%.Funding carry out of the euro may well be seen as less risky than funding out of the yen, where USD/JPY one-month volatility trades at 8.5% and the Bank of Japan could come in any day now and briefly drive USD/JPY 2-3% lower.The eurozone data calendar looks bare and EUR/USD could drift towards 1.1555/65 without much fanfare.Chris TurnerJPY: Many moving parts It is hard to have a conviction call on USD/JPY right now. It seems the Japanese lower house will be dissolved next week and a snap election will be held on 8 February. The playbook assumes that any big improvement in the LDP's fortunes is a yen-negative on the view that looser fiscal and monetary policy will be favoured and more likely. What constitutes a big improvement for the LDP? Probably a 34-seat gain such that the LDP party itself commands a simple majority.However, we have all been surprised by Japanese politics before. And there is little concern that now the former LDP coalition party (Komeito) has teamed up with the main opposition party (CDP), the opposition could offer stiffer resistance. An LDP failure to convert PM Takaichi's strong popularity ratings into more seats could end up sending USD/JPY lower again.There's also the FX intervention threat, and one outlandish idea we presented in this month's FX Talking was that of joint Fed-BoJ intervention to sell USD/JPY, which would be a game-changer. Suffice to say that USD/JPY looks like a volatile story over the next month and that even at 8.5%, one-month traded USD/JPY volatility does not seem especially expensive.Chris TurnerPLN: The cutting cycle continues and all options remain on the table Yesterday's press conference by the National Bank of Poland confirmed that the cutting cycle continues despite the fact that rates remained unchanged on Wednesday. At the same time, the governor kept the February meeting open but did not rule out a longer pause, possibly until April. This leaves a whole range of scenarios on the table and conviction on the timing of individual rate cuts is not high.During the press conference, we heard that the terminal rate could be 3.50%, but a lower number cannot be ruled out either. Overall, the picture has not changed much for us. We expect that inflation will continue to support further rate cuts, but it is clear from the governor's rhetoric that we also need to monitor the labour market and wage developments. For now, our economists' forecast remains unchanged – three more rate cuts in March, May and September to 3.25%, as the end of the cutting cycle.The market reacted dovishly to the press conference and reversed Wednesday's hawkish move. The terminal rate was priced slightly down by 2bp to 3.41%, and we will probably see a return to previous lows near 3.30%. FX was not very reactive, but yesterday's press conference gives us an indication to expect a rather weaker PLN as liquidity returns to the market. For now, we expect the market to test 4.220 due to this week's NBP message.Frantisek TaborskyMore By This Author:The Commodities Feed: Iranian Supply Risks Ease, But Have Not Disappeared Rates Spark: Sterling Rates And US TIC Data Polish Central Bank Sees Decline In Inflation As Durable And No Longer Stresses Upside Risks