In the latest edition of ‘My thoughts on currencies’, Stephen Jen builds on his foundational framework, separating the enduring macro trends from the volatile trade war overlay, to assess where markets and policy may head next. While the underlying global picture had been improving, the events of April 2 introduced a layer of uncertainty and fragility.
Jen argues the dollar remains the cleanest short, as structural headwinds are mounting and consensus narratives around trade and tariffs continue to unravel. The equity sell-off, bond market volatility, and persistent disinflation point to a stagflationary near-term shock for the US. Meanwhile, the Fed is likely to be cornered into rate cuts, regardless of how independent it wishes to appear.
Beyond markets, the note dives deep into the geopolitical mechanics of the trade war, suggesting that the US and China have shifted into a "war mentality" with all the zero-sum logic that entails. A détente may come—but only after further escalation. Europe, for now, holds optionality. The key challenge for investors, Jen concludes, is to look past the noise, stay focused on the durable macro forces, and understand that the rules of engagement have changed.
Key Quote
“A stronger dollar responding to the US trying to compress its external deficit – a near-unanimous argument until only a few weeks ago – never made any sense to me.”
Table of Contents
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Bottom line
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The Trade War
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The Fed
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Financial market outlook
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Some musings
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