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Forward Guidance
Why FX Volatility Will Dominate Markets In 2025 | Brent Donnelly
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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Quick takeaways
- The potential implementation of a 25% tariff on Canada and Mexico may lead to severe economic repercussions, including a possible currency collapse for Canada.
- Current foreign exchange dynamics reflect investor caution due to a hawkish Federal Reserve stance, limiting the expected impact of tariffs on currency valuations.
Deep dives
Impact of Inauguration on Currency Expectations
Following a recent inauguration, the uncertainty surrounding the implementation of tariffs has significant implications for currency markets. Anticipation of a 25% tariff on Canada and Mexico could have dire effects on the Canadian economy, potentially leading to a currency collapse and massive job losses if executed. The discussion contrasts this scenario with past experiences from 2017 and 2018, where initial tariff threats led to a surge in the dollar's value before ultimately declining due to inaction. Current market expectations suggest a cautious approach, with lower probabilities assigned to the enforcement of large tariffs, indicating a more stable outlook for currency valuations in the short term.
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Discover
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