2025 Poseidon Point of View – Foreign Exchange

Foreign exchange (FX) might seem like a distant concept, but it’s deeply intertwined with our everyday lives. Whether you're traveling around the globe, managing loans, trading currencies for investment purpose, or taking advantage of interest rate carry strategies, FX plays a critical role. Beyond just transactions, it’s about understanding the market and navigating future rate movements, to well-positioning the portfolio and avoid negative carry.

A Month of Central Banks Meetings

Going into December, traditionally seen as a month of rest and celebrate with the Christmas holiday season. Yet, the financial world remains far from chill…. Several major central banks, including the Federal Reserve (Fed), Bank of Canada (BOC), Swiss National Bank (SNB), Bank of Japan (BOJ), and European Central Bank (ECB), are set to hold key monetary policy meetings this month, some of them already had it. All these meetings are not just year-end performance review, they hold significant weight in shaping FX rate movements for the year ahead, particularly the USD, CHF, and JPY, which heavily act as investment currency and funding currency. The policy shifts could set the tone for global markets, influencing portfolio strategies across different asset classes in the next year.

Fed and USD

Recent US economic indicators continue to highlight the nation’s resilience economic outlook. Non-farm payrolls remain robust, reflecting steady salary that supports overall consumption. Core PCE inflation, a key gauge favored by the Fed, indicating a growing consumption trend. Meanwhile, both PPI and CPI readings indicate that inflation and high interest environment has not eroded purchasing power significantly, and although weekly jobless claims have shown a gradual upward trend, the broader outlook remains positive when compared to other major economies that also embracing rate cuts. With the US economy proving its strength, we forecast that the dollar stands firm amid a global environment of monetary easing, setting it apart as a currency backed by resilient growth rather than accommodative policy. Additionally, the rapid rise of AI technology fuels further capital inflows into the US stock market, providing another layer of support for the USD.

Beyond the data, we would love to discuss a new normal that we found in the US economy. Even in a high interest environment, the US economy continues to perform, we found that partly due to an hourly wage structure that can adjust in line with inflation, in 2022 over 55% of US workers were hourly worker according to the Bureau of Labor Statistics, it’s actually helping workers maintain their real income levels. At the same time, the surge in credit card usage suggests evolving consumer behavior and greater spending flexibility, particularly when consumers feel secure in their jobs and future income, they’re generally more comfortable to spend more which . Further, under the Trump administration, there is a renewed push to reassert American economic leadership, raising an important question: If the US can thrive despite tighter monetary conditions, is it truly necessary for Fed to revert rates to their historical terminal levels? One thing to remind is would the US enter into a small recession due to trade tariffs like 2018?

SNB and CHF

Yesterday, the SNB surprised markets by cutting its benchmark interest rate by 50bps, bringing it down to 0.50%. This decision quickly made the CHF cheaper and more attractive as a funding currency, which simply means it’s now a bit easier and less expensive for global investors to borrow CHF. In response, USD/CHF climbed to the 0.89 level, showing a 1.13% drop in the CHF’s value. We believe that SNB’s move fits with recent signs of weaker inflation in Switzerland since July 2024, and by taking this step, the central bank hopes to support its economy through a lower deposit rate which encourage more cash activities.

However, this accommodation has a ripple effect beyond Switzerland, inadvertently strengthening the USD. With the dollar gaining ground, it upsets the delicate balance among various USD currency pairs, most notably USD/EUR. Here, the transatlantic gap in economic conditions becomes more pronounced, as the eurozone and the US economy diverge on inflation, economic growth in different aspects, and policy direction. We anticipate that the growing imbalance would likely to persist at least through the first half of the year given robust U.S. economic data and lively stock market activity, strong capital inflow into US AI related stocks. In contrast, both the CHF and EUR appear poised to remain relatively weak, as their respective central banks maintain more accommodative stances and their economies face a less supportive growth backdrop.

BoJ and JPY

BoJ is going to have its rate decision on 19 Dec 2024, we anticipate the BoJ Ueda will raise its policy rate by 25bps in response to underlying inflationary pressures. Although recent CPI figures did not show a dramatic uptick, we believe there is a more serious inflation problem not fully captured by the official data, also the inflation has actually reflected in its PPI data. The weaker JPY may mask some of these pressures for outside observers, but Japanese households are likely feeling the impact of rising costs at home. Although BoJ is likely to hike its rates, we still believe JPY act as funding currency remain attractive.

On the trade front, we foresee the US tariffs aimed at China could indirectly benefit Japan. Given the importers have to pay for the tariffs, US companies would definitely looking to reduce their dependency on Chinese imports in order to reduce their operating costs. Moreover, Japan is renowned for its strong manufacturing and high-end product capabilities (such as AI chips and related components), stands to gain. Over time, this shift in supply chains should lend support to the JPY, strengthening it from its current levels. However, while we expect the currency to appreciate, we don’t foresee it breaking below the 140 marks against the USD in the coming year. Nonetheless, since current JPY positioning appears relatively neutral, large one-directional moves driven by position unwinds seem less likely.

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