Intro: Hello and welcome to Macro Minutes. During each episode, we'll be joined by RBC Capital Markets experts to provide high conviction insights on the latest developments in financial markets and the global economy. Please listen to the end of this recording for important closures.
Peter: Welcome back to Macro Minutes. Today is the 21st Jan 2026. My name is Peter Schaffrik and I will be your host today. When planning this episode, we were certainly not short of topics. Between renewed threats to Fed’s independence, renewed tariffs threats and counterthreats, a hard JGB sell-off we probably have more to unpick than we can cover in one episode, but we shall try as hard as we can. We labelled this episode “Beware the cracks” which might apply to geopolitics just as much as to markets it appears. I am joined today by Blake Gwinn, RBC’s head of US rates strategy and resident Fed watcher as well as Richard Cochinos from our FX strategy team. I suggest we jump right into the deep end, and I would like to start with Richard.
Richard. So let's start with the topic de jour. We seem to have a little bit of a mini replay from the Liberation Day playbook following the recent geopolitical events, and the US dollar is weakening, so what matters more for the US dollar? Greenland? Venezuela, or US earnings and something else entirely?
Richard: That's a great question, Peter, and the answer unfortunately is both, in the sense that if you look at price action and the dollar and currency markets this week, it's not necessarily Greenland and Venezuela or I would say the geopolitical risks that matter, but really what was driving the dollar sell off and the 1% lower in the USD that we have this week was the threat that the US was looking at an additional 10% of tariffs on European countries that were opposing the US desire to acquire Greenland. That's something which immediately affects trade, immediately affects global growth, it changes global risk, and at the end of the day, with stocks down in the US, the dollar is down as well.
This is where it's the push and the pull. If we look at the US purely and the dollar purely from the US domestic perspective, the outlook is very favorable, right? We have very strong growth, some of the strongest in the G10 currently right now. It's expected to be well above 3% to 4% on an annualized basis for Q1.
And if we actually look at kind of the overall outlook. We have a central bank, which, you know, the market is expecting only mild cuts, but you still have mild cuts expected in a non-recessionary environment. You have very strong growth, all of that, very favorable for US asset markets on itself. Again, from the foreign perspective, the US is becoming now a riskier country, and this idea of threat of tariffs really does change the outlook for both US stocks and the US dollar, and that's what's causing some of the short-term dollar weakness coming through the market.
Prior to Saturday, the market seemed almost comfortable building a long dollar or a short Euro position. Again, on this more fundamental outperformance US growth story. So when I say it's both of them that matter, it really matters on the horizon, right? If the US does push forward these additional tariffs and there's a European response to it, it's likely we're gonna get greater dollar weakness going forward. Absent that being a direction of macro and market risk, it's likely that we're gonna return back to this idea of investment in the US, which tends to lead to additional dollar strength.
Peter: Let me move it to Blake and stay on a slightly different but related topic. So that the dollar was not the only thing that went down Treasuries, and specifically the long bond also took quite a bit of a beating. So, these are big moves in US yields and spreads, and the re-steepening of the curve over the last. Few days. What do you think is actually driving it, Blake?
Blake: Yeah. I think there was a mishmash of things that also in turn turned into a bit of a positioning squeeze, probably mostly on the kind of fast money hedge fund space. Over the last month to two months, we've really seen investors loading up on these long carry positions. I think that's largely a function of the fact there's been very low directional conviction on rates. We've seen vol collapsing, so investors have really been moving into those carry types of positions.
With that backdrop you kind of head into last Friday, we got some headlines around the Hassett versus Warsh FOMC race, basically suggesting the Hassett may not be the choice for fed chair. That kind of seemed to provide some of the initial trigger, but I think that quickly started to spill over into a bit more of that positioning squeeze that I was talking about, putting some of the pressure on those carry positions. I think you also had a little bit of focus on Treasuries, upcoming refunding release last Friday. Treasury released these survey that they do every quarter of primary dealers. There's always a bit of a focus on that, looking for some kind of signs that Treasury is going to change their issuance if they were going to change it, that would generally be in a direction of pushing rates higher, increasing, long end issuance, et cetera. We really didn't get anything there, but that focus may have also been in the ether when we're thinking about things that were driving that sell off. And then I think after Friday, into the weekend and then Monday with the US closed, then we saw the price action in Japan related to idiosyncratic factors there. But that started to spill over into the US. And the overnight session when we saw treasuries open, they were following on that sell off in Japan. I think you couple all this with the fact that the risk environment was pretty, pretty downbeat. Equity futures were also down quite a bit from Friday's close as we headed into this week.
That also added some pressure that was largely around these Greenland headlines, potential new tariffs, et cetera. And then lastly, I would just say the volatility itself. So once we saw yields starting to sell off on Friday, and once we punctured those ranges that have been very well established for quite some time, that in and of itself probably shook a few people out of this complacency that we've had on these very tight ranges with low vol and everybody focused on carry. I did think it was a bit interesting. Once we got into the Tuesday session here in the US, things did start to stabilize in the US trading hours, we basically closed with tens basically unchanged from where they came the US session at 9:00 AM It's interesting when you compare that to equities, which continued to grind lower throughout that US session. We got a lot of news flow on Tuesday. There were all these headlines coming in on the foreign relations front, on trade front, on the Fed chair race, but I didn't really see anything there that would've fundamentally reversed that kind of move or stabilized rates? I really think it was just that we had this kind of dip buying mentality. As I mentioned before, this was really a fast money hedge fund focused trade. You probably had some real money people with dry powder, very quick to come in and buy that dip. That was also true in spreads, basically the same story. We had a lot of whipsaw overnight and then essentially stabilizing during US trading. I think people were just very quick to come in and buy that dip.
Peter: Let me maybe follow up. I'm not quite sure to whom to put the question. Maybe to the both of you. There seems to have been a little bit of a resurgence, albeit still quite minor of the de-dollarization theme that we had earlier in the year. So specifically one of the headlines that I've seen is this announcement by a Danish pension fund that they would be moving away from the US Treasuries and the dollar. Is that credible? And what do you see? What are the flows suggesting? And maybe I just throw it to Richard first before I give Blake a bite at it.
Richard: Yeah. De-dollarization. I'm going to shift that buzzword to diversification if I can when talking about currencies, because there's a couple of things. And if I'm gonna zoom out and talk about the dollar from a long dated perspective, you gotta talk about asset allocation and strategic asset allocation in US assets relative to rest of world.
Now, the world has built up and overweight on US assets very passively, but very intently over the last 15 years because US equity markets and US fixed income markets have been major outperformers. So again, when you think about your strategic portfolio. As long as those markets continue to outperform, you're gonna continue to hold your overweights. And those have drifted larger over the last five years, over the last 10 years, over the last 15 years, really since the global financial crisis ended in 2009. Okay, so that sets the framework for an existing overweight on US assets relative to what your strategic benchmark should say. De-dollarization: There's a passive reallocation or an active reallocation. And then specifically on currency, a hedging flow. I take a look a lot at the TIC data and I won't talk too much about it 'cause I know Blake will as well. And if you look at foreign purchases of US assets, meaning US stocks and the major US rate markets, those have really only gone up since COVID.
And interestingly enough, since 2025 when we first talked about this scene, they've been net buyers of US assets over that full horizon. So in other words, they are continuing to buy US assets, but with the dollar in particular, it's the stock of assets you own. That's much larger, right? I think foreigners own close to 22 trillion in US equities versus 7.8 trillion in US treasuries and 1.4 in agencies and maybe 5 trillion in corporate bonds. But the point is, foreigners own about 36 trillion in US assets. Now they've continued to buy, but what's more important is what's their hedge ratio on those assets that really is the big flows that drive a dollar stronger or weaker.
We think those hedge flows were low starting 2025, and they were obviously the 8% of dollar weakness that we saw over 2025. They've come up a little bit. But the Fed has been slow to cut. It still has rates elevated to rest of world. We think that the market is expecting it to cut a little bit more this year as that cost of hedging comes down, that unleashes additional waves of dollars selling. With the last 48 hours, always a knee-jerk reaction to headline. I don't think this is really structural changes in hedging flow behavior that would cause more medium term dollar weakness, but that's also something that we very much expect over 2026 and 2027. How fast it is really comes down to the rates discussion in the Fed discussion, meaning how cheap does hedging become? For foreigners on their US assets or what's the immediate need, right? Big spikes in volatility they're gonna need to hedge quicker, which can cause additional waves of dollar weakness.
Those are the two things that we have in mind when we're looking at Q1 of ‘26 and the whole of 2026.
Peter: I was just about to say, I get it. It's the, it's more for the dollar, it's more of a hedge story rather than the underlying assets. So maybe could point to bring Blake in. What do you think? On the underlying assets, specifically in Treasuries?
Blake: Yeah. Peter, on the underlying assets. Look, we went through bout of this back in April and May of 2025, and I don't wanna belabor a lot of these points. We spent a lot of time back then, both on this podcast, but also in our writings, discussing all the reasons why. It is very hard to structurally pull away from owning treasuries. I'm not gonna belabor all those points. It is a massively deep and liquid market, the types of size that we'd be talking about. It's very hard to find places to actually move with that cash if you're looking for other safe assets that have the depth and liquidity that would be needed. The fact that such a large number of international transactions or still denominated in dollars. It's just a very, very difficult system with a lot of very positive network effects. It makes it very hard to pull away from treasuries writ large. Now, all that being said, and this is what we highlighted back in April and May last year, you can say all that, and you can look at these headlines and say, X, Y, or Z investor really doesn't hold that many treasuries.
Let's say we find out some pension fund is liquidating 10 billion of treasury holdings, 50 billion of treasury holdings, et cetera. Those numbers may not amount to much, especially when you consider how much treasuries, how many treasuries are actually changing hands every day. That may be a drop in a bucket.
That's not really what concerns me, but what I'm a bit more wary of is that you get enough headlines like that and it really starts to become more of a fear of this de-dollarization story. Again, like we saw in April and May, and that's what could actually end up pushing yields higher is that it's not the single pension fund that shows up in the headlines, liquidating the pushes prices higher, but it's the dozens of other large portfolio managers that see those headlines get a little bit worried, start being a little bit more cautious on rolling their treasury portfolios, in participating in auctions and adding to long positions, et cetera. It's really those knock on, it's really the vibes. It's really what that could do to sentiment. Uh, I will just say it's, it's always been true that I think this. This kind of fiscal sustainability, quote unquote, who's going to buy it all? Those fears run very deep in some investors' bones, and I think stories like what we saw with this pension fund, those are really positive confirmation for those very deeply ingrained fears. So that's something I'm watchful of. It's not the flows I'm worried about, but I am worried that we get into another kind of mini bout of panic about de-dollarization then that alone could be enough to put some upward pressure on yields. That's certainly what I'm looking for. What could be the tipping point? I think if we start seeing more of those stories in the coming weeks, that could certainly set that off. But ultimately, like we saw in April and May, and I would even throw in 2023 this August to October period, where people were really worried about deficits and we saw this kind of mini freak out around deficits.
Both of those periods, what ultimately ended up happening is that markets moved back to really focusing on the Fed, the macro outlook, et cetera, so it really did prove temporary. That's what I would expect around this. But that doesn't mean these kind of fears couldn't send rates or risks, that those fears could send rates higher than near term.
Peter, if I can turn this around a bit here, given that you're on the European side and you're here with us, so what do you think on the topic from the European side, do you see any evidence of these types of rotations or is that something you're concerned about or think is gonna drive yields in the near term?
Peter: I'm totally with you. I think generally there's not a great alternative to these very large amount of Treasury holdings. What I would say is two things. First of all, we know that Europe as a whole is a very large holder of treasuries and going back to the point that Richard has mentioned earlier, even a little bit of diversification away out of Europe could potentially amount to quite a meaningful sum. That's number one. And secondly. Whilst I generally say that we in Europe over here are not like we don't have a directive economy. There are some funds that probably take a little bit more cues from let's say the government or generally some major stakeholders. So I think that there could be some who are a little bit more prone to that. Having said that, I think maybe a broader point that I can make is, I mean, since this week, I do feel that the sense in Europe has really shifted up a notch on the worries about what the US wants to do, how much they get away with what the Europeans need to do. And the sense that I can see is that in contrast to liberation Day, where it was basically the whole world. This is like US versus Europe. So I could see maybe some stronger reaction coming out of Europe than otherwise the case. But generally I agree. I don't think this is the point where Europe starts to dump all of their treasuries and buy something else with it. That's not gonna happen.
By the way, thank you for bringing me into the conversation as well. If I can move the conversation on a little bit and, maybe staying with you, Blake, you mentioned earlier something that I'd like to return to, you mentioned the Fed chair discussion, which is obviously another big theme for the market here. Can you just dive into that a little bit more? What specifically are you and the market focusing on here?
Blake: The Apprentice – FOMC Chair edition. This just keeps dragging on and on. We've seen this kind of horse race where it seems like Hassett, it seems like Warsh, and we've been moving back and forth. I think what got things going when I mentioned before that it was a bit of a driver last week, it was really the surge in Warsh’s and pullback in Hassett’s odds that really started to move things. And I think the reason for that is that markets have generally decided that Warsh is more negative forTreasury, more negative for spreads. I think that's in part because he's seen as whether this is true or not, he's seen as potentially more independent than Hassett, maybe not as dovish on the rate front, but I also think more importantly probably is, is that there is this contingent out there that pretty firmly believes that some of his prior hawkishness on balance sheet policy is something that could drive things so that he may come in and try to significantly reduce the size of the Fed's balance sheet.
That could mean continuing QT, so getting that started again, remember the Fed just stopped QT late last year, or per perhaps even selling assets outta the Fed's portfolio. Now, to be fair, I think those are very unlikely. I think the contingency that really views things this way is probably pretty small, but presumably they're still trading, so I, I think can still drive some price action there.
I would also just say, even if I disagree with this, and this actually tracks back to what we were just saying about kinda the perception around de-dollarization rather than de-dollarization itself. We've seen this in the past with these Fed share races, that once the market decides on a narrative of what each of these individuals represent, it's very hard to fight against that.
Now, personally, we've been in the mindset that whether it's Hassett or Warsh, the actual outcomes that you're gonna see over the next year or two years, very, very similar. They're not going to be doing anything particularly different on rates policy, they're not gonna be doing anything particularly different on balance sheet policy. And even if their views are slightly different on those things, their ability to affect diverging policy paths is relatively limited. We've been making that argument a lot on the rate policy front, that basically one participant, even if it is the chair, is not really enough to change course to deliver these kind of uber-dovish outcomes that some of these candidates for Fed chair have been discussing. And I would say on the balance sheet side, after the Fed restarted those purchases in December we're calling RMPs now, you know, the rest of the committees basically established that they don't really have tolerance for repo market volatility. So I don't think Warsh can just come in and change that. But again, to my prior point, it's really hard to break that market perception. And the market still seems to be treating Warsh in this kind of negative for spreads, negative for treasuries type of way. On the balance sheet, regardless of what he can actually get through the rest of the committee, we have to think about Powell. We have to think about Trump as well. . And I think if you have Trump as mad as he is at Powell, wait until you see what happens when his brand new Fed share basically decides to start selling Fed assets and pushes mortgage rates a hundred bps higher. We know from the actions over the last couple weeks some of the policy changes they've been talking about, the restarting of purchases of MBS. They care a lot right now about mortgage rates about borrowing rates, selling assets out of the Fed's balance sheet, or shrinking the Fed's balance sheet in a way that would push those rates up. I just can't see any tolerance for that. It's just really hard to see Warsh enacting some of these balance sheet policies that I think some people might be expecting when they're selling treasuries on the steam, steepening, the curve, et cetera.
Peter: I can certainly see the tweets afterwards with a lot of capitals in it. I can definitely see that.
Blake: I can't imagine he'd be happy.
Peter: Let me shift the focus a bit and it is probably more for Richard really. It is related to the treasury sell-off, but I would quite like to move to Japan. So the yen is at its weakest, it's been in decades. The JGB market is stuck in a multi-sigma sell-off and the equities up actually 7% in the past month or so. What do you reckon is going on and maybe which of those is gonna break first?
Richard: You alluded to that yen is weak. If you chart it up on either your computer or Bloomberg or anything like that, you can see that Dollar/Yen hasn't really traded above 160.00 in a material way and stayed above there, since 1986. And so we're just a hop, skip, and a beat away from 160.00 currently right now it's tested it a few times, and recently the BOJ was intervening and meaning 2024 was intervening in FX markets to really keep it from materially moving higher. Now, in the short term, what breaks, it's either gonna be currency or the equity market.
JGBs are very much undergoing price discovery right now. That's a process which is likely to continue over the next couple years. Currently, the Bank of Japan is still actively engaged in quantitative easing, meaning they're purchasing JGBs in the primary market, in the secondary market on a monthly and quarterly basis. Now, they're tapering those purchases, but they are going to still be purchasing them in 2026 and 2027. So as that taper comes down, meaning they're purchasing less on a monthly and quarterly basis, naturally you need substitution of the private market to buy those bonds. And it's very clear the private market is requiring higher yields, so that process of JGB yields higher is gonna likely continue over 2026 and 2027, which brings us back to the currency and the higher those bonds go, the more I would say the incentive for Japanese domestics, which is a lot of fixed income investors, is to invest domestically, and that kind of creates a giant sucking sound outta global fixed income and currency markets. Right now, Japanese investors purchase about a hundred billion US dollars worth of foreign bonds. Most of that is in treasuries. On an annual 12 month rolling basis, that number fluctuates between 300 billion and a hundred billion. But importantly, it's been falling all of 2025, and that's something that, again, yields higher in Japan, that Japanese demand for foreign fixed income and for US yields that risk-reward changes where again, they can get better yields staying at home than they can from investing in treasuries, and then FX hedging it back to the Japanese yen. So that's a flow that we're expecting this year, which will lead to less yen selling, hence dollar yen lower in the FX market.
Now because obviously the other main trade in Japan is what's known as the “Takaichi Trade” or Japanese fiscal stimulus, supersizing Japanese equities outperformance as the currency appreciates that's likely going to help. It'll basically put a cap in terms of the acceleration higher in Japanese equities that we've seen. That is a very large foreign participation in the recent runup that we've seen since Q3 and Q4 of last year. So again, as the currency tends to appreciate, you're just gonna see a little bit less participation. And Japanese equity markets are likely gonna continue to trade higher, but just not with the blinding speed, which they've done it over the last two quarters. So that's kind of our playbook of how we look at Japan. The Bank of Japan, Ministry of Finance, probably going to be intervening in currency markets if dollar end trades above 160.00. But at the end of the day, it's the shift in flow in the backup in JGB yields that's really gonna cause again, the Japanese demand for foreign assets to decrease, and that helps trigger medium-term yen appreciation.
Peter: You just mentioned intervention, that's another source of volatility. And if I may, as a last follow up, I know we're running up to time, stay in Asia for a second. So in the volatile environments that we've seen over the last couple of days, the Asian currencies were acting quite a bit as a safe haven, which is a bit odd given they’re high beta. So first question is, can you explain that and then related to that, can you give us maybe a bit of a highlight of your favorite themes in currencies and trades going into Q1? I know that CNY is high up on the list of currencies that you would like. What else are you telling clients at the moment here?
Richard: First question, can we explain the Asian outperformance over the last 48, 72 hours or since the dollar weakness has come to markets? And you're right, generally when you see rate selling off stock market, selling off things like Aussie dollar tend to sell off as well. It's very high beta to stocks overall and it's appreciated, and we've also seen the New Zealand dollar appreciate, and we've seen the Chinese Yuan appreciate all over the last 72 hours. I think it's important for clients to remember that underlying currency markets is always this change of order flow based on not “Am I just buying this asset because I expect it's gonna outperform”, but “Do I need to hedge my foreign assets that I already own as much”?
And one of the main things in Asia is that the cost of hedging has flipped between US was the highest yielding asset market as we began 2025, and as we ended 2025 in November, Australia became the highest yielding asset market of all the G10 markets out there. In other words, for an Australian based investor that was buying US equities generally, they weren't really hedging those as much as they could because they got a little bit of a yield bump and a pickup by the carry being positive on the US dollar versus the Australian dollar. Now that's flipped. It flipped in November and it continues to accelerate away. So what we find is flows for Australian based asset managers, they're actually starting to hedge more. In other words, for all of the stocks and the bonds that they own in Europe and specifically the US I'm gonna talk about, 'cause that's the main investment market that they are now selling the US dollar and buying the Australian dollar because that differential, that carry pickup is now in their favor to be in Aussie dollars for those assets. And that's something which is likely to continue over this year and next year as well. So that shift of a carry dynamic really has created a more structural bid or buy signal on the Aussie dollar. It's one of the ones that we like as a year ahead theme, we're recommending long Aussie versus short the Swiss Franc because that creates 4% and just carry differential alone. But we're also looking at what's the underlying theme of markets outside of Greenland in US and Europe. It's been a commodity story. You can see it in gold, you can see it in copper. You can see it in silver. Australia is a large exporter of precious and industrial metals the same way Canada is, and that's created upward pressure on the Australian dollar as well over this kind of period where if you're unsure about US and Europe, well asset markets tend to pivot to where they think there's gonna be growth.
We have additional fiscal stimulus in Japan. We expect additional fiscal stimulus in China to be announced by March. And you have a very strong commodity story and a growth story for the region. So all of that, when you're uncertain about the US and European outlook tends to pivot capital flows to Asia, the Australian dollar, the New Zealand dollar, all have performed very well in this risk off market, but also the Chinese Yuan has continued to appreciate. And that's one that's, again, more of a structural view that we have. China has a very large trade surplus with Europe. That we think it's trying to adjust by allowing the currency to appreciate going forward. And, of course, the market is looking at its low growth and saying for you to meet your 5% growth target, you're gonna need to stimulate domestically, which also creates a lot of excitement about these Asian currencies as well.
So that kind of is our strongest views, CNH outperforming the US dollar in the European Euro is one of our year ahead trades that we're recommending currently right now, and long Aussie dollar versus short the Swiss Franc, CHF is another one, which we're recommending for the year.
Peter: Guys, that's great insights. I'm certain that we'll return to these and related topics time and time again. It looks like we've not cracked anything irreversibly just yet, but sadly, I fear that the underlying topics will not simply disappear either. With it, the need to remain vigilant in the market and risk for quick and large moves will not go away.
So thanks again, Richard. Thanks Blake. Fantastic insights. Thank you for participating in today's episode, and thank you all for listening. Please join us again for our next episode of Macro Minutes.
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