USD: Neutral
Last month we revised our position on the US dollar upwards, adopting a neutral stance in the short term. The current level of uncertainty has triggered a flight to the dollar, and the US economy is less exposed to energy market turmoil. However, we maintain a structurally negative view of the US dollar against a broad range of developed and emerging markets. Once the conflict’s evolution becomes clearer, we believe investors will be further driven to diversify their exposure to the US dollar.
RMB: Overweight
We maintain an overweight position on the renminbi in the medium term. Central Bank Governor Pan stated at the China Development Forum that China has neither the need nor the intention to resort to currency depreciation to gain a trade advantage. China will likely facilitate access for a greater number of international investors to Chinese capital markets and further improve the cross-border use of the renminbi. In our view, this could indicate that China might leverage the phase of US dollar strength to keep the USD/RMB exchange rate relatively stable, while potentially showing appreciation against other major currencies. This adds to the substantial Chinese trade surplus recorded since the beginning of the year.
JPY: Overweight
The negative terms of trade shock caused by rising energy prices is negative for the yen compared to currencies of energy-exporting countries such as the US dollar. However, we believe the yen could potentially outperform the currencies of smaller Asian economies and European ones, which are also exposed to rising energy prices but lack the strategic energy reserves and fiscal buffers needed to offset the shock. A broad shock could also trigger flight-to-quality flows, supporting the yen against higher-beta currencies. The threat of intervention has capped the USD/JPY exchange rate at 160. However, a more pronounced downward move in USD/JPY will likely require clearer evidence than currently available that the US economy is moving toward recessionary dynamics.
AUD: Overweight
The Middle East crisis has improved Australia’s terms of trade, supporting the Australian dollar against currencies of energy-importing countries in Europe and Asia. Additionally, the RBA’s restrictive stance has made the currency the highest-yielding in the developed markets universe. A sufficiently large increase in oil prices could raise fears of global growth, generating safe-haven flows that might weigh on the Australian dollar; however, at current oil price levels, we believe recession risks remain relatively moderate.
GBP: Underweight
The persistent strength of the pound against both the US dollar and the euro is difficult to justify in light of the UK’s deteriorating terms of trade and growing concerns about fiscal sustainability, especially considering the sharp rise in gilt yields. Temporary support for the pound could come from seasonal flows related to April dividends and still restrictive rate differentials, but these factors appear transitory. In our view, the underlying outlook for the pound remains negative. Although the impact on growth from rising energy prices is not yet evident, with recent data on GDP, the labor market, and PMI indices remaining solid, this resilience is unlikely to persist. Second-quarter growth is increasingly at risk of contraction as the impact of higher energy costs transmits through the economy. A slowdown in growth should limit the markets’ ability to price in further aggressive rate hikes in the UK. At the same time, fiscal risk premiums could become more relevant if rates remain at current or higher levels. Political uncertainty could also amplify this risk. In this context, the pound appears vulnerable, particularly against currencies with stronger external fundamentals and more credible fiscal anchors.
