The markets are in a state of flux, and it's anyone's guess where they'll land by summer. The old adage of 'sell in May and go away' seems to be taking a backseat as investors are now more inclined to take on riskier assets, largely driven by the AI super-cycle and the prospect of a near-term peace deal between the US and Iran. However, the risk of stagflationary shocks and a stronger dollar for longer could be a double-edged sword for investors.
The currency trends are likely to be driven by central bank reactions, with the G10 currencies of Norway and Australia poised to shine. These currencies are buoyed by high interest rates and a favorable export mix. On the other hand, currencies with negative real rates and on the wrong side of the commodity ledger, such as the Japanese yen, are expected to underperform.
The US dollar has delivered a middling performance so far, but it could enjoy some short-term gains as the market temporarily prices a Federal Reserve tightening cycle. Even though we expect a European Central Bank hike in June, the EUR/USD could test the 1.15 region again as US inflation picks up at a time of stable US activity. However, the house call of the US economy slowing this year, a risk premium re-emerging ahead of November midterms, and a Fed cut in December mean that we retain a 1.20 EUR/USD forecast for year-end.
Elsewhere, the sterling faces a long hot summer of political risk, which could add to an already vulnerable picture. Talking of politics, we expect demand for Hungarian assets to remain strong after recent elections, and we also see the Czech koruna as a good store of value in Central and Eastern Europe. In Asia, the North-South FX divide is expected to continue, and in Latin America, we think Brazil's high implied yields can keep the real strong despite local politics.
In my opinion, the markets are in a state of flux, and it's anyone's guess where they'll land by summer. The AI super-cycle and the prospect of a near-term peace deal between the US and Iran are driving forces behind the current market trends. However, the risk of stagflationary shocks and a stronger dollar for longer could be a double-edged sword for investors. The currency trends are likely to be driven by central bank reactions, with the G10 currencies of Norway and Australia poised to shine. The US dollar could enjoy some short-term gains, but the long-term forecast for the EUR/USD remains unchanged.
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