Forward Guidance Why FX Volatility Will Dominate Markets In 2025 | Brent Donnelly
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Jan 22, 2025 Brent Donnelly, a seasoned expert in foreign exchange markets, shares his insights on FX volatility that could dominate in 2025. He discusses how tariffs from Mexico and Canada might influence the currency landscape and the interplay between inflation and Federal Reserve policies. Donnelly also breaks down his framework for currency trading, highlighting the significance of interest rate differentials. The conversation includes a deep dive into the dynamics of carry trades, particularly the yen carry trade, and the broader implications for global markets.
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Trump's Two-Week Promises
- Brent Donnelly recalls Bloomberg's comical article on Trump's "two-week" promises.
- These promises, like those about tariffs, often go unfulfilled.
FX Volatility and Dollar Drivers
- FX volatility acts as a release valve for tariff expectations.
- The dollar's rally is primarily driven by rising yields and the Fed's response to sticky inflation.
Fed's Reaction Function and Market Impact
- The Fed may not significantly react to minor inflation fluctuations above the target.
- A non-hiking Fed in a strong economy is favorable for risk assets as it removes uncertainty.
