Until US President Donald Trump nominates a new Fed Chair, the Fed’s credibility concerns remain latent, allowing the Developed Market exchange rates to be driven primarily by monetary policy divergences rather than hypothetical threats to its independence. For 2026, the futures/OIS markets are keeping the USD on the defensive by pricing two rate cuts at the Fed and the Bank of England, no change at the European Central Bank and the Swiss National Bank, one hike at the Bank of Japan and the Bank of Canada, and two hikes at the Reserve Bank of Australia and the Reserve Bank of New Zealand.
However, in the near term, the same markets expect these central banks to keep their policy rates unchanged at their first monetary policy meetings in 2026. So, expect volatility in data that questions the market’s asymmetric pricing of interest rates across countries. For example, US jobs data has eclipsed better-than-expected GDP growth in driving the dovish Fed outlook. Conversely, Australia’s elevated inflation readings amid an improving economic outlook supported the RBA’s pivot towards holding policy restrictive for longer with a tightening bias. Having rebounded from its post-Covid low slightly below 0.60, AUD/USD could extend its rise towards 0.70 pending a sustainable break above 0.67.
Fingers crossed, Venezuela is unlikely to be a market-moving issue. With Venezuela already heavily sanctioned and isolated from global capital markets, any tough rhetoric carries limited immediate economic or oil market risk, making it an example of America’s policy assertiveness. President Trump’s State of the Union address in late January or early February may reinforce a broader message that access to the USD-centric financial system is conditional on political alignment and compliance. Such framing could add to longer-term concerns about the weaponisation of the USD, keeping the de-dollarisation narrative intact. Hence, any decision by the US Supreme Court to rule against Trump’s use of the International Emergency Economic Powers Act (IEEPA) for tariffs (in January or February) could hurt the greenback through a fiscal hit from potential tariff refunds.
Against this background, markets have noted the CNY’s steady appreciation following the April 2025 US Liberation Day tariffs. USD/CNY closed the year 2025 lower by 4.3% at 6.9890, below 7.00 for the first year since 2022. The CNY emerged stronger after Beijing demonstrated its policy resolve to resist asymmetric tariff pressure from Washington. The transition into 2026 should mark a less politically charged phase in US-China relations. Presidents Trump and Xi are expected to meet several times, amid Trump’s preoccupation with the US mid-term elections and China’s launch of its 15th Five-Year Plan (2026-2030). Like Brussels, Beijing has been pushing for a larger international role for its currency, not as a direct challenge to the free-floating USD, but as a more trusted and steadily managed currency within the global system. Hence, it was likely no coincidence that spot USD/CNY started trading below its daily fixing in December.
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“Don't judge each day by the harvest you reap, but by the seeds that you plant.”
Robert Louis Stevenson
January 5 in history
Robert Louis Stevenson published "Strange Case of Dr Jekyll and Mr Hyde" in 1886.
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