2026 FX OUTLOOK：EXPECTATIONS FOR MONETARY EASING LIKELY TO BECOME KEY TRADING THEME AGAIN FOR SOME TIME
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2025-11-07 23:18:54
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Since the beginning of 2025, the global FX market has been affected by disruptions from tariff expectations and sharp fluctuations in the USD exchange rate. In 1Q25, the USD index declined from high levels as the implementation of President Trump's tariff policy was slower than expectations after he took office, leading to a reversal of the "Trump trade". In 2Q25, the USD depreciated considerably due to two reasons:
1) The US abruptly announced the significantly higher-thanexpected "reciprocal tariffs". This, coupled with the escalation of US-China trade friction, resulted in market concerns about the US economic outlook and the stability of USD assets. These market concerns combined triggered a wave of "de-dollarization".
2) Expectations for interest rate cuts increased markedly due to the persistently weak employment data in the US, further weighing on the USD.
The USD movements stabilized in 3Q25. The tariff agreements reached between the US and its major trading partners mitigated market concerns about the US economy and its financial stability, which led to a slowdown in de-dollarization. The rate-cut trade experienced a short-term reversal following the start of the Fed's interest rate cuts in mid-September. In addition, political uncertainties heightened in France and Japan. Due to the absence of new dominant trading themes, the USD entered a period of sideways movements and consolidations. The downward trend in the USD, which was observed in previous quarters, halted temporarily.
Looking ahead into 2026, we think key trading themes in the global FX market will be the narrowing of interest rate differentials and potential changes in risk appetite. In the base-case scenario, the Fed may have more room to cut interest rates than other central banks, and the average level in the USD fluctuation range may decline. However, considering that the USD has fallen substantially in 2025 and long positions in the USD are no longer crowded, we believe the decline in the USD will be limited in 2026.
A slowdown in the US labor market since the mid-2025 and the weakening of both job supply and demand are prompting the Fed to consider adopting looser monetary policy. In addition, the possibility that the Trump administration will appoint a dovish candidate as the new Fed chair in 2026 may give rise to market expectations for aggressive easing.
In the new landscape of the international monetary system, a combination of factors caused by the Trump administration's actions is pushing the USD into a down-cycle. Given that long positions in the USD are no longer crowded and the US economy still has advantages over Europe and Japan, we believe the easing trade1 alone is unlikely to cause the USD to decline by 10%, which was recorded in 1H25. The room for the USD depreciation will be relatively limited, in our view.
In terms of the renminbi, we believe in 2026, the core variables affecting the renminbi exchange rate may include the USD trend and potential changes in expectations for China-US economic and trade relations. China's measures to stabilize exchange rates may have an important impact on expectations for the renminbi exchange rate movements. In the base-case scenario, we believe a potential further decline in the USD as well as the likely narrowing of the China-US interest rate differential amid the Fed's interest rate cuts could support a continued moderate appreciation of the renminbi.
As for impacts from tariffs, we believe the pressure of tariff risks on the renminbi is easing as China's economy and financial markets have shown resilience amid tariff headwinds. China's export growth is strong; the SHCOMP Index is now at a 10-year high, indicating relatively good risk appetite. The renminbi has become less sensitive to US tariff risks. Therefore, even if the US-China tariff pressure increases next year, its impact on the renminbi will still be more moderate than the effect of the USD depreciation, in our view. 机构：中国国际金融股份有限公司 研究员：Liuyang LI/Jie SHI 日期：2025-11-07
1) The US abruptly announced the significantly higher-thanexpected "reciprocal tariffs". This, coupled with the escalation of US-China trade friction, resulted in market concerns about the US economic outlook and the stability of USD assets. These market concerns combined triggered a wave of "de-dollarization".
2) Expectations for interest rate cuts increased markedly due to the persistently weak employment data in the US, further weighing on the USD.
The USD movements stabilized in 3Q25. The tariff agreements reached between the US and its major trading partners mitigated market concerns about the US economy and its financial stability, which led to a slowdown in de-dollarization. The rate-cut trade experienced a short-term reversal following the start of the Fed's interest rate cuts in mid-September. In addition, political uncertainties heightened in France and Japan. Due to the absence of new dominant trading themes, the USD entered a period of sideways movements and consolidations. The downward trend in the USD, which was observed in previous quarters, halted temporarily.
Looking ahead into 2026, we think key trading themes in the global FX market will be the narrowing of interest rate differentials and potential changes in risk appetite. In the base-case scenario, the Fed may have more room to cut interest rates than other central banks, and the average level in the USD fluctuation range may decline. However, considering that the USD has fallen substantially in 2025 and long positions in the USD are no longer crowded, we believe the decline in the USD will be limited in 2026.
A slowdown in the US labor market since the mid-2025 and the weakening of both job supply and demand are prompting the Fed to consider adopting looser monetary policy. In addition, the possibility that the Trump administration will appoint a dovish candidate as the new Fed chair in 2026 may give rise to market expectations for aggressive easing.
In the new landscape of the international monetary system, a combination of factors caused by the Trump administration's actions is pushing the USD into a down-cycle. Given that long positions in the USD are no longer crowded and the US economy still has advantages over Europe and Japan, we believe the easing trade1 alone is unlikely to cause the USD to decline by 10%, which was recorded in 1H25. The room for the USD depreciation will be relatively limited, in our view.
In terms of the renminbi, we believe in 2026, the core variables affecting the renminbi exchange rate may include the USD trend and potential changes in expectations for China-US economic and trade relations. China's measures to stabilize exchange rates may have an important impact on expectations for the renminbi exchange rate movements. In the base-case scenario, we believe a potential further decline in the USD as well as the likely narrowing of the China-US interest rate differential amid the Fed's interest rate cuts could support a continued moderate appreciation of the renminbi.
As for impacts from tariffs, we believe the pressure of tariff risks on the renminbi is easing as China's economy and financial markets have shown resilience amid tariff headwinds. China's export growth is strong; the SHCOMP Index is now at a 10-year high, indicating relatively good risk appetite. The renminbi has become less sensitive to US tariff risks. Therefore, even if the US-China tariff pressure increases next year, its impact on the renminbi will still be more moderate than the effect of the USD depreciation, in our view. 机构：中国国际金融股份有限公司 研究员：Liuyang LI/Jie SHI 日期：2025-11-07
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