In our 2026 FX outlook published this week, we make the call that the low-volatility environment will extend into 2026 and carry trade strategies will remain popular. The question of whether investors have over-reached into carry was partially answered yesterday, when one popular target currency, the Hungarian forint, faced some tough news on the budget side. We discuss this in more detail below. EUR/HUF briefly rallied 0.7% on the news, but has already corrected half of that. We argue that perhaps some looser fiscal policy was already priced in by the market, but at the same time, the resilience of the forint shows a market reasonably wedded to carry trades in a mixed environment for core markets. We also note that Latam currencies are performing very well, buoyed by high carry and the metals story.
As to core markets, mixed seems an appropriate description. The dollar was briefly hit yesterday after private sector payroll firm, ADP, suggested that 11k jobs had been lost per week through October. This report used a different methodology from its recent release, showing +42k jobs created that same month. Yet the dollar did not stay offered for long and has come back a little bid overnight. Here, USD/JPY is leading the charge, where buying the Tokyo fix was being blamed for the move. One factor thought to be keeping USD/JPY supported is direct investment into the US. These potential flows have brought USD/JPY to psychological resistance at 155, where Japanese verbal intervention is picking up. However, few will want to sell USD/JPY at 155, fearing that it could easily run to 160 in thinning year-end markets and that physical intervention to sell USD/JPY probably won't come before that 160 level.
For today, the focus will be on the US House presumably passing the Senate compromise bill to reopen government, at least until 30 January. If approved, that means the US government can reopen, perhaps on Friday, and that the September NFP jobs report (potentially USD negative) can be released early next week. Before then, we have a keynote speech from New York Fed President John Williams at 1520CET today. He is seen as slightly doveish, though looks unlikely to move the needle on current pricing of a 66% probability of a 25bp Fed cut in December.
While we would love to say that the dollar made a significant high last week, the catalysts for it to come lower are not obvious right now. That's why we think DXY probably traces out a 99.25-99.75 range for the time being.