Key Highlights

• Indonesian stocks trade limit-down after MSCI warnings over transparency.
• ECB Governing Council’s Martin Kocher warns rate cuts may be needed to curb euro strength.
• Strong 40y auction helps calm JGB markets.

Chart of the Day

Dollar momentum weakens heading into FOMC meeting

^{Source: BNY}

The dollar is heading into the FOMC decision on a soft note but, notwithstanding President Trump’s dollar commentary yesterday, there are no signs of panic selling yet. The currency is in fact marginally net-bought on a three-month rolling basis, although there have been clear signs of deterioration over the past week – a week which brought multiple sources of event risk, even tariffs versus major trade partners.

Dollar interest started the year on a solid note, so the recent softness could reflect some degree of month-end rebalancing. We wouldn’t make any strong judgments on structural changes in flow interest until a material change in flow averages begins to take shape. In addition, cross-border flows are currently registering a marginal net-selling daily flow average for the dollar over the past three months. The bulk of the damage was done before the December FOMC meeting and around year-end, and we acknowledge that the past week has not been great for the dollar either. However, the flow magnitudes are also not enough to suggest that cross-border investors have a major “sell U.S.” trade in place; at most there is a prevailing “hedge the dollar” view, but without much conviction.

On a holdings basis, the dollar is in a much better position than it was in the run-up to the December FOMC decision, though overall hedges are still above the rolling 12-month average. The reduction toward year-end may also reflect some squaring of underlying asset positions, which would naturally reduce hedging interest. Otherwise, however, the figures confirm our view that there isn’t a sufficiently strong “sell U.S.” theme in place for now. The narrowing of the gap between aggregate and cross-border investors also indicates that USD accounts are now restricting their FX risk.

What's Changed?

The global mood for risk is swinging unevenly, with USD falling for the fifth day in a row to a four-year low. Gold has climbed to a new record high of $5,300/oz and APAC equities have rallied, led by EM shares, while EU shares are lower but U.S. futures higher. Japanese bonds have rallied, but EU and U.S. rates have softened only slightly. Even Australia, with its announcement of higher CPI, saw lower yields as the RBA looked through the energy noise and took in the jump in AUD.

FX volatility. USD usually plays only a negligible role in driving investor moods. The FX market is child’s play compared with the volatility normally seen in equities and sometimes in bonds. However, the focus has shifted, in part because of the JPY and KRW intervention risks and the U.S. Treasury’s support for capping USD gains. President Trump added to the FX moves late yesterday when he shrugged off dollar losses, likening the moves to a yo-yo. The warnings from Martin Kocher of the ECB on EUR moves add to the picture that FX movements matter across markets.

Central bankers on the docket. A focus on today’s Fed, BoC and COPOM rate decisions will dominate markets. No changes are expected, but guidance matters; many see a divergence between dovish EM and hawkish DM advice in flows, with EM equity holdings above DM holdings in our data. Brazil is expected to sound ready to cut, while the BoC may point to a bottoming-out in rates and the FOMC will likely keep rates on hold for an extended period unless inflation or jobs change the picture. Also in the mix are BoJ minutes highlighting the role of the weak JPY and entrenched inflation risks: more rate hikes are needed, but the timing is unclear, linked to wage deals ahead.

Big tech earnings and AI. Ahead of the earnings reports for MSFT, META and TSLA, the ASML Dutch chip lithography maker announced record Q4 orders – doubling vs. the expected demand – adding to expectations of AI investment continuing through 2026. SoftBank added to the upward push in technology shares with plans to invest $30bn in OpenAI. South Korea’s SK Hynix reported stronger profits, linked to AI memory chips.

Bottom line: Beyond rate decisions, the markets are watching the U.S. geopolitical and political risks, which come on top of month-end hedging and rebalancing. The role of oil today could be a surprise, with U.S. Secretary of State Marco Rubio issuing a warning to Venezuela if it doesn’t cooperate. Oil and gasoline inventories will also matter given that the API reported surprise drawdowns and that U.S. WTI crude oil remains close to a price breakout. The risk of a U.S. government shutdown is also hanging over the markets. Between oil and the USD, investors will be watching for the next yo-yo trick – like rock the baby or walk the dog. 

What You Need to Know

Indonesia’s equity market saw sharp volatility after the MSCI raised concerns over market investability and potential index changes. Indonesian stocks plunged as much as 8%, triggering a temporary trading halt, with several large-cap names falling around 15% amid fears they could be excluded from upcoming MSCI reviews. MSCI said it had paused some index additions due to fundamental investability issues, including concentrated ownership, free float transparency and concerns over price distortion. The firm warned it could reassess Indonesia’s market accessibility status by May, potentially reducing index weightings or prompting a downgrade to frontier-market status. Foreign investors sold a net $192mn of local equities in the week ended January 23, the first outflow in 16 weeks. JCI -7.346% to 8320.556, USDIDR -0.358% to 16706, 10y IDGB +0.6bp to 6.365%.

The JGB market has steadied, after a 40-year bond auction attracted the strongest demand since March. This eased immediate fears triggered by a recent selloff in super-long debt. The successful sale helped pull yields down from record highs and stabilized sentiment after weeks of volatility linked to fiscal concerns and Prime Minister Sanae Takaichi’s proposal to cut food taxes ahead of a snap election. Strategists cautioned that the auction did not mark a decisive shift in underlying demand, noting that buying was supported by elevated yields and tactical positioning. Attention is now turning to upcoming long-dated bond sales and the February 8 election, with investors and policymakers wary that political uncertainty and fiscal risks could keep volatility high in the super-long segment. Nikkei +0.047% to 53358.71, USDJPY +0.244% to 152.58, 10y JGB -4.9bp to 2.242%.

ECB policymaker Martin Kocher has said the central bank may need to consider another interest rate cut if further euro strength begins to materially lower inflation forecasts, while stressing that recent gains in the single currency do not yet warrant action. The Austrian central bank governor said the ECB would react not to the exchange rate itself, but to its impact on inflation via lower import prices. Kocher said policymakers are monitoring the dollar’s recent weakness amid geopolitical tensions, speculation over possible U.S.-Japan currency coordination and investor diversification away from U.S. assets. He warned that trade risks remain elevated despite some easing in transatlantic tensions but said the eurozone economy has proved more resilient than expected and expressed cautious optimism on growth, while emphasizing the need to retain full policy optionality. Separately, Governing Council Member François Villeroy de Galhau also stated that the strong euro is a “factor that will guide monetary policy.” Euro Stoxx 50 -0.123% to 5987.24, EURUSD -0.407% to 1.1992, BBG AGG Euro Government High Grade EUR -0.6bp to 2.964%.

French Finance Minister Roland Lescure has downplayed recent yen volatility, saying currency moves should be left to markets to reflect underlying economic fundamentals. Speaking after chairing a G7 meeting, Lescure said the yen’s recent strength was modest when viewed against its longer-term depreciation and argued that foreign exchange movements are being appropriately priced by markets. He dismissed calls for policy intervention, stressing that ministers should focus instead on supporting balanced growth, productivity and economic stability. Lescure declined to comment on any currency discussions among G7 finance chiefs, reiterating the group’s long-standing commitment to market-determined exchange rates. He also urged cooperation over unilateral trade actions and said France’s G7 presidency would prioritize addressing global imbalances, particularly China’s large trade surpluses. CAC 40 -1.087% to 8064.19, EURUSD -0.407% to 1.1992, 10y OAT -1.7bp to 3.421%.

What We're Watching

The BoC is expected to keep rates unchanged at 2.25%.

The FOMC is expected to keep rates unchanged at 3.75%.

Brazil’s central bank, the BCB, is expected to keep rates unchanged at 15% but point to a March cut.

U.S. Treasury sells $69bn in 17-week bills and $30bn in new 2y floating-rate notes.

What iFlow is Showing Us

Mood: iFlow Mood has stabilized near its highest level since early January 2022, at 0.405, driven by rising equity buying momentum against selling in core sovereign bonds, reflecting the fiscal-related concerns.

FX: COP, PEN and EUR posted the most inflows, against HUF, ILS and INR outflows. USD and JPY were lightly sold.

FI: Indonesian government bonds selling dominated fixed income flows, followed by outflows for Chilean and Israeli government bonds. G10 bonds were broadly bid.

Equities: European, South African and Indian equities were significantly sold, against strong buying interest in Peru, Czechia, South Korea and Malaysia. Within EM APAC, materials were bought significantly followed by the information technology, health care and industrials sectors, vs. selling in the financials, energy and consumer discretionary sectors.

Quotes of the Day

“To yo-yo you have to let go.” – Frank Conroy

“Gravity is the yo-yo’s partner, not its enemy.” – Anthony Palmieri

Economic Details

Germany’s consumer climate has improved modestly but remains deeply negative, according to the latest GfK Consumer Climate powered by NIM survey. The headline indicator is expected to rise by 2.8 points m/m to -24.1 in February, clawing back part of the sharp decline seen previously but remaining at a historically low level. The improvement was driven primarily by a sharp rebound in income expectations, which jumped 12 points m/m to 5.1, supported by the January minimum wage increase and easing inflation concerns. Willingness to buy also rose, increasing by 3.5 points m/m to -4.0, its best reading since early 2022. By contrast, willingness to save was broadly flat, remaining high and continuing to restrain consumer spending optimism. DAX -0.271% to 24827.02, EURUSD -0.407% to 1.1992, 10y Bund -1.8bp to 2.857%.

Italy’s January confidence indicators showed modest improvement among consumers and a stronger recovery in business sentiment. Consumer confidence edged up slightly to 96.8 from 96.6, supported by improved views on the national economic outlook and future conditions, while assessments of the current and personal situation remained cautious. The composite business confidence index rose more decisively to 97.6 from 96.6, driven mainly by a sharp improvement in market services and a smaller gain in manufacturing. By contrast, confidence weakened in construction and deteriorated significantly in retail trade, reflecting poorer assessments of sales and inventories. Within manufacturing, order books and production expectations improved despite rising stock levels, while construction firms reported worsening order conditions and stable employment expectations. FTSE MIB -0.441% to 45240.14, EURUSD -0.407% to 1.1992, 10y BTP -1.6bp to 3.453%.

Switzerland’s January UBS-CFA economic confidence indicator fell by 10.9 points to -4.7, marking a sharp deterioration in sentiment. The monthly survey of financial analysts by UBS and the CFA Society Switzerland reported weaker expectations amid heightened geopolitical tensions referenced by respondents. Despite the decline in confidence, analysts’ macro outlook remained relatively stable, with average forecasts pointing to GDP growth of 1.1% this year, followed by a modest acceleration to 1.3% in 2027. Monetary policy expectations were unchanged, with more than 70% of participants expecting the SNB to keep its policy rate at 0% over the next 12 months. The survey results signal softer near-term sentiment without a material shift in growth or policy expectations. SMI -0.933% to 13092.9, EURCHF +0.292% to 0.91956, 10y Swiss GB -2.7bp to 0.247%.

New Zealand employment indicators for December 2025 showed a flat trend m/m in seasonally adjusted filled jobs, which came in at 2.35 million (down 709 jobs). Actual filled jobs fell 0.1% y/y to 2.38 million (down 1,505 jobs). By industry, construction declined by 3.1% y/y (6,118 jobs) and manufacturing was down 1.6% y/y (3,849 jobs), while health care (+1.9% y/y, 5,280 jobs), public administration (+2.9% y/y, 4,644 jobs) and education (+1.5% y/y, 3,256 jobs) rose. Gross earnings increased by 1.1% y/y to $16.5bn. NZX 50 -0.725% to 13412.87, NZDUSD -0.265% to 0.603, 10y NZGB +3.3bp to 4.628%.

Australia’s CPI inflation accelerated again in December: headline CPI rose 3.8% y/y (November: 3.4% y/y), while the trimmed mean edged up to 3.3% y/y (November: 3.2% y/y). The Q4 trimmed mean was up 0.9% q/q, 3.4% y/y from 1.0% q/q, 3.0% y/y in Q3 2025. The main drivers were housing (+5.5% y/y; +1.17 percentage points contribution), food and non-alcoholic beverages (+3.4% y/y; +0.60 percentage points) and recreation and culture (+4.4% y/y; +0.57 percentage points), At the detailed level, electricity inflation remained very high (+21.5% y/y) as government rebates rolled off, while services inflation picked up to 4.1% y/y (November: 3.6% y/y) on domestic holiday travel and accommodation (+9.6% y/y) and still-firm rents (+3.9% y/y). Overall, the mix points to lingering non-tradables/services pressure (non-tradables +4.6% y/y) alongside holiday season volatility in travel. This keeps the disinflation story uneven and likely leaves the RBA focused on persistence in services and housing-related components rather than the rebate-distorted energy prints. ASX -0.151% to 5499.68, AUDUSD -0.172% to 0.6999, 10y ACGB -3.1bp to 4.814%.

South Korean December 2025 online retail platform revenue rose 11.8% y/y, driven by a rally in domestic consumption, reported the Ministry of Trade, Industry and Resources. Key sectors with growth included groceries, food delivery and home appliances. Offline retailers saw limited revenue growth of 0.4% y/y, recovering in H2 after a decline in H1, supported by government policies under the Lee Jae Myung administration. Department stores’ sales increased by 4.3% y/y and convenience store sales were flat, while supermarket sales fell 4.2% y/y due to competition from online grocery platforms. KOSPI +1.691% to 5170.81, USDKRW -0.651% to 1428.8, 10y KTB -1.8bp to 3.527%.