FX, I believe, will be a major macro asset to pay attention to in 2025.
Tariff implementation is a direct result of the fact that FX currency exchange rates are used to offset interest rate differences between countries. This directly impacts global capital flows, which are a key driver for global currencies.
Brent Donnelly from Spectra Markets is one of my favorite macro FX traders.
There’s nothing like watching the entire episode. Here are some of my favorites:
Capital flows and FX Currency:
“The hard thing is that the capital flow stuff kind of happens around the edges. So if you have a good capital flow story, that could be marginally biased in one direction. But if the bigger drivers like rate differentials are pointing in the other direction, it’s not going to work. So capital flows tend to be more of like an accelerant, not a directional driver.”
How carry trading is the major driver of currencies in emerging markets:
“For an EM it’s usually all about the carry. So if you can sell USD and buy Brazil and it goes nowhere for a year, let’s just say you make 10% on that carry. That’s a really good carry trade. So dollar Brazil is going to go up and down. But if you have the view that dollar Brazil is going to go down, it’s kind of a free lunch. So like for two years in Mexico, it was basically a free lunch to own Mexican pesos because reshoring was good and that led to a steady and stable carry trade.”
What is the effect of Bank of Japan’s recent rate hike?
“They did a hike recently of 15 basis points and they did one of 20 and now the market’s expecting 25 and 22bps is priced in.
So then the question becomes this: If this hike is priced in, which it is, what are the signals from the central bank at the meeting? They could hike 15 and just say, you know, they are a little bit scared about market stability because they felt like they blew up the world in August. And because of that guidance paired with so much of the hike already being priced into markets, it could end up being a dovish outcome for the meeting.”
The interview contains many other interesting bits, such as a detailed look at how Trump’s threats of tariffs are affecting FX currencies. I would highly recommend that you check it out.
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