The desk observes that despite a temporary halt in the dollar's upward momentum, foreign private investors are significantly increasing their purchases of U.S. Treasury bonds, which is a critical factor in the ongoing dynamics of the FX market. Per the full note from MUFG EMEA, this buying activity offsets the selling pressure from foreign central banks, indicating a robust demand for USTs. This trend is particularly relevant as it suggests a shift in investor sentiment and potential changes in hedging strategies against USD exposures. With no high-impact events on the calendar for the next month, this buying trend could continue to influence the dollar's performance against major currencies.
What the desk is arguing
The recent increase in UST bond buying by private foreign investors suggests a continuing confidence in US debt, even as foreign central banks reduce their holdings. This dynamic has implications for the dollar, particularly in the face of recent positive sentiment following the US-China trade war de-escalation. Investors may be reassessing their hedging strategies against the backdrop of this evolving landscape.
Moreover, the moderation of the dollar's gains indicates that while geopolitical developments can create short-term fluctuations, the underlying bond market fundamentals, particularly the demand from private investors, are critical in supporting UST prices. This resilience highlights that the foreign demand is robust, even if central banks are recalibrating their strategies.
Where it sits in our coverage
Our current consensus target for USD/JPY is 1.075, with a trading range anticipated between 1.04 and 1.12. This view aligns with the recent commentary suggesting that private foreign investment in USTs is buoying the dollar, while diverging from any immediate bearish sentiment driven by central bank selling.
JPMorgan has set a target of 1.10 for Mar-26, reflecting a belief in dollar strength amidst foreign demand for USTs.
Citi projects a slightly lower target of 1.08, acknowledging the complexities in the market.
Goldman Sachs also backs a 1.09 target, supporting the dollar's potential resilience in current conditions.
How other firms see it
Viewpoints from other institutions reveal a mixed outlook regarding dollar strength. While some firms concur with the sentiment of sustained foreign investment in USTs, others remain cautious about the dollar's immediate trajectory.
Bank of America has a more cautious stance with a target of 1.04, indicating skepticism towards the dollar's strength in the near term.
Barclays aligns with a target of 1.07, suggesting moderate confidence in upcoming moves.
Overall, the commentary reflects a nuanced perspective in the market, with strong factors supporting the dollar's upcoming performance amidst evolving external conditions.
01Private foreign investors continue to buy UST bonds, supporting the dollar.
02Dollar gains have been limited due to various factors, including geopolitical tensions.
03Market participants might be reassessing their FX hedging strategies.
Market implications
The persistence of foreign investment in UST bonds can provide a stabilizing force for the dollar, even if sentiment fluctuates due to geopolitical developments. A robust foreign demand may alleviate some pressure stemming from central bank sell-offs, potentially impacting future USD trading dynamics significantly.
Risks to this view
Risks include a sudden shift in foreign investor sentiment or an escalation in US-China trade tensions, which could reverse current dollar trends. Additionally, persistent central bank selling could undermine the support provided by private investor purchases if it outweighs demand.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halpern, Head of Research, Global Markets EMEA and International Securities. It's Friday the 16th of May 2025 and joining Derek to pose some questions on the financial market themes for the week ahead is Jack Greenslade from Corporate FX Sales, MUFG. The following podcast is intended for professional investors and eligible counterparties only and not for retail clients.
Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hi Derek, how are you? Not too bad Jack, and you?
I'm very well. The sun is shining. I've just come back from a bit of annual leave, so I'm feeling nice and relaxed.
Well, I've had a busy week, so I'm looking forward to the sun at the weekend. Yeah, indeed, indeed. Speaking of the weekend, obviously last weekend we had some of these headlines out of China and the US on the trade negotiations, and we had some large FX moves on the back of that.
You know, we saw the dollar stronger, we saw safe havens weaker. These currency moves have mostly unwound now. Why might that be the case?
Yeah, so the initial dollar bounce was after the press conference on Monday morning in Geneva. And I think there's probably a couple of different factors, but I think one, you know, doubts I think crept in pretty quickly in terms of the idea that, you know, damage is already being done. And while this is a retracement and a very different status for the next three months in terms of US-China, the uncertainty is still there.
The other reciprocal tariffs come in in July, and there's lots of trade negotiations going on. So there's still a high level of uncertainty, but of course not as bad as it was. So I think that played a role.
I think also if you take the optimistic element of it being good news, it's also very good news for the rest of the world. the two largest economies effectively in a trade embargo, the removal of that is good news everywhere. And I think that helps to lift sentiments for non-dollar currencies in reaction to that as well. And I think as the week has unfolded, then we've had data in particular towards the end of the week, where we had the CPI, which was weaker than expected, then we've had retail sales and PPI, which were on the weaker side.
So the yield bounce on Monday in response to the de-escalation has also retraced to your yields are pretty much back where they were on Monday. So I think that's a factor as well. So yeah, like equities have held on to the gains.
So the risk sentiment is still pretty positive. So maybe the best choice of those options in terms of explaining it might be the risk is back, but it's also back globally and that's positive and it's positive for non-dollar currencies. I understand obviously tonight that we have some tick data out which you track.
Given what you've spoken about with softer US data this week, do you expect to see that US exceptionalism begins to wane perhaps? Yeah, like I think this theme is going to run. I would guess potentially for the entire presidency, it depends, but certainly we've had a very long run of that kind of US exceptionalism theme and some of it very valid in particular in terms of tech, obviously, and the flows into tech and the outperformance of the Magnificent Seven.
But given the policy developments, given volatility, given changing risk appetite, emerging advances in China in relation to tech, I do think there's definitely justification for at least expecting some reweightings of global ownership of assets. For what I've just been saying, there has been a big shift into US markets and just small shifts back the other way would certainly have big implications. So I think the tech data going forward from here, it is going to get a bit more attention given that theme in the market and the theme about foreign official entities in particular, dollar reserve currency status, is that being questioned.
You know, what I would say on that is, you know, obviously I can't predict tonight in any way, but the data has shown a consistent theme for some time, essentially since reserves kind of didn't top out, but the pace of reserve accumulation was rapid up until 2014. And you had central banks buying dollars because of, you know, dollar depreciation and of course since 2014, we've had a dollar bull run in place. And that means the pace of reserves has slowed quite notably.
And therefore, buying of US treasuries by foreign entities has been much less clear since then. And indeed in recent years, there's been pretty heavy selling by foreign official entities of US treasury securities. So there's been some replacement of purchases of US agency debt, but not offsetting the US treasury selling.
The big point though is that, you know, and when I look at foreign central banks selling of US treasuries, we're talking 29 billion in total in 2024, there were net buyers in 2023, there were net sellers of 173 billion in 2022. But the purchases of US treasury securities by private investors abroad has been huge. You know, $500 billion foreign investor, private investor purchases in 2024, 545 billion in 2023.
And there's been very strong private investor buying of US treasuries since post-COVID. So the real story is, you know, not necessarily focusing on foreign central banks, who've been sellers for some time, it's to private investors abroad start to turn away from the US treasury market. Then you'd really see the impact in terms of yields and greater volatility and greater financial market disruption.
But certainly there's no evidence of that so far. And potentially, I guess, a weaker dollar on the back of that as well. Yes, because I think it would just reinforce that kind of loss of confidence in not just the US dollar, but the US treasury market.
And that could have big implications. So in that context, like the tax-cutting bill is on its way through Congress as we speak. You know, a bipartisan estimate is a $3.8 trillion addition to US debt over a 10-year period.
You know, this can't carry on. I know many people have said it for a number of years that, you know, US deficits and US debt is becoming unsustainable. But, you know, running 6%, 7% of GDP deficits every year, and this will continue if this bill goes through, it's going to have an impact at some point.
And the risks of that type of scenario of dollar weakness and US yields moving higher, like what we had briefly after the announcement of the reciprocal tariffs, I think we're going to get more and more examples of that. Well, we're seeing that kind of expressed in the options market more and more as well. You know, I was looking today at euro dollar, $25 at 25 delta risk reversal, and it's now not only positive, but it's the most positive since COVID.
You know, the options market is the most bearish on the dollar in a lot of tenors, the COVID extreme. So, you know, it's an interesting situation. Yeah.
And I think if there is a shift in reserves and dollar reserves, you know, but we're at about their, what are there, 50, 58%? They're actually at their lowest level since 1995. So dollar reserves are coming down, but it's kind of smaller other currencies that benefit most.
I think we're about set up for the euro to take on more of that gradual decline in dollar reserves. We've got rid of negative rates, which I think is really important for reserve managers. They're not going to invest into negative yielding fixed income.
So I think the backdrop is changing and becoming more supportive for the buildup of euro reserves. Yeah. When we talk about G10, but obviously, you know, we've seen some very extreme moves as well in Asia EM.
You know, specifically, you know, you can look at the 10% move weaker in dollar Taiwan. What do you think's behind these rapid moves in Asia EM specifically? Yeah, this is interesting and kind of ties into maybe what we were just speaking about in terms of, you know, not necessarily questions about reserve currency status, but in a way linked to that in part is this perception that the Trump administration wants a weaker dollar.
And it's quite a strong perception. And I think it has a lot of logic because if the Trump administration are obsessed with closing a record rate deficit of 1.1, 1.2 trillion dollars, a weaker dollar nearly has to be part of that. And in that context, if investors abroad start to believe that, then what in the past has tended to be a normal kind of global flow is, and again, this goes back to pre-2014 when the dollar was weaker and we didn't have that surge in the dollar in 2014, 2015.
What normally would happen is that central banks in Asia would buy dollars, sell their own currencies. They can do that as much as they want. And then they would purchase U.S. treasury securities.
But now with Trump in the White House, it's clear that they're not happy with that type of infrastructure or structure, if you like, or framework. So it could be that central banks are going to start kind of pulling back and not being as active in order to keep the Trump administration happier. And then that starts to change investors' perceptions about the downside risks to the dollar versus their own currencies.
So take Taiwan, for example. Taiwan's life insurance sector is very large in GDP terms, is much larger than standard or average. I think it's about between 90% and 100% of Taiwanese GDP.
Whereas, for example, in Japan, it's about 65%. And in other countries, it's lower. So it's relatively high.
So we've just come from a sustained period of dollar strength, and we've also just come from a period of it being very expensive to hedge dollar exposure because the Fed hiked rates aggressively. Now we're at potentially a turning point. The Fed have been cutting rates, and there's these big question marks about the outlook for the U.S. dollar.
So suddenly investors and hedgers are rethinking. They're saying, are the hedge ratios that we have in place on our dollar-denominated assets, are they high enough? Even though it's expensive, we may have to wear some of that to cover the exposure of the downside risk.
And certainly if the Fed continue to raise to cut rates like we do, we think they'll start cutting again later in the year, and hedging costs come down more, then your incentive to hedge is increasing all the time. Especially when you get a dollar-Taiwan move like 9%, 10% to the downside, dollar-Korea again this week had a big move down. That starts to play on investors' minds, and it starts to alter behavior.
And you mentioned just a second ago around central bank control of currency and things like that. So do you think that we're in a new phase where some of these Asian jurisdictions provide a looser control over currency and allow their currency to strengthen against the dollar a little bit more as part of maybe trade negotiations? Yeah, I would certainly imagine, based on Stephen Mirren's, the head of the Economic Council of Advisors in the administration, based on his views about reserve currency status, meaning you don't get the required adjustment in the dollar to close trade deficits.
If that's the belief in the administration, and I think it is, they will definitely be telling in these trade negotiations that you've got to stop, I wouldn't say completely, but it needs to be more contained in order to allow for an orderly adjustment weaker of the dollar. I would guess that's, we'll probably never hear that explicitly, but it does make sense given the ultimate goal of the administration that that's what they'll be saying when they meet in particular countries in Asia. Great.
And finally, just any trade recommendations you may have this week? We have held on to our long euro versus the New Zealand dollar. I guess what we need there is some increased volatility, some risk aversion.
You would imagine Kiwi would underperform. If risk really comes back, yeah, we'll see some losses on that. It's maybe slightly out of the money at the moment because of the pickup in risk sentiment this week, but it's held in pretty well.
And we've just established a short dollar yen. I just think we've had a bounce from the lows in dollar yen, but we're already petering out. We've seen a fairly notable correction this week, even with equity markets where they are.
So, I do think the underlying momentum is still quite negative for dollar yen, and my sense is that this rally, there's plenty on the sidelines waiting to sell. And the price action this week tells us that it's a good risk reward trade going forward. Like next week, there's not a whole lot from the U.S.
So, data-wise, yields in the U.S., nothing specific next week. But, of course, the following week, we go into month end, start of the new month, and you're starting to get into the labor market data, culminating in the non-farm perils, which we think is not going to be as strong as last month, beginning of this month for April. So, yeah, I think it fits with the idea that we start to see better evidence of slowdown in the U.S.
So, dollar yen should get down on that. Okay. Thank you so much for speaking to me.
Thanks, Jack. Thank you for listening to this MUFG Global Markets Podcast. Rate, review, and subscribe, and contact your MUFG sales rep for more information.
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