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The Macro Brief – Top questions for currencies in 2026
2 Plays3 seconds ago
Paul Mackel, Global Head of FX Research, and Joseph Incalcaterra, Head of LatAm Macro Strategy, look at what's in store for the major currencies in 2026.
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Transcript
Introduction to HSBC Global Viewpoint
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
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Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
Macro Brief: Currency Market Insights for 2026
00:00:28
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Hello and welcome to the Macro Brief, the podcast that looks at the issues driving financial markets across the globe. I'm Aline van Duyn in New York and today we're going to take a peek into 2026 and ask some of the most pressing questions that are on currency investors' minds.
00:00:46
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Now the currency markets have a daily average turnover of over $9 trillion dollars and are often the first to react to changes in policies and politics. So 2025 has been quite a year in the currency markets. Started with a strong dollar, with trade tensions, government deficits, geopolitical shifts. They've all contributed to a very different picture now towards the end of the year.
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So what is ahead?
2025: A Transformative Year for the US Dollar
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To tell us more, I'm joined by Paul Mackle, our global head of FX research, and Joseph Incalkatera, our head of LATAM macro strategy.
00:01:22
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Welcome to the studio, both of you. Thank you very much. Thanks, Céline. Paul, can we start with a quick recap of quite an unusual year for the US dollar in 2025? You described it as starting with elevated euphoria.
00:01:36
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What happened next? A lot had happened. i mean, this year, in terms of just thinking about the broad dollar, has been quite transformational. So in the sense that it was... ah very much benefiting in terms of anticipation of quite aggressive and stimulative policies from the Trump administration.
00:01:53
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And that was seen boosting the dollars. so it was a very, very bullish environment for the dollar, as I said, in the start of the year. But then markets started to question it, what the policies could do. Could it be undermining US growth?
00:02:07
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And as a result, the mood music started to change. Was that particularly around tariffs? It was ah related to tariffs for sure, but I think it was also related to the idea about what tariffs could do to the US economy.
00:02:21
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And you start to see some softness in the survey data. And as a result, there was more two-way thinking about this dollar bullish view. And then, of course, we hit another game changer ah related to politics.
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And that was associated with the German election outcome, which was quite transformational once more. about its fiscal
2026 Currency Market Volatility: Political and Policy Uncertainties
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story. And then we hit Liberation Day, and of course everyone understands the big shock that impacted the dollar pretty much across the board.
00:02:51
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And of course, after such a big shock, ah then the tremors begin to calm and dissipate, and the dollar's been quite stable. So we've had a number of different stages to this currency over the past few quarters. And as I said, it's been quite surprising to many.
00:03:06
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And Joseph, bringing in more the emerging market perspective, that roller coaster ride presumably reflected in the emerging market currencies too. For sure, we're seeing it across emerging markets, but especially in the Latam space. And that's because of an idiosyncratic election a cycle where you have basically all the major economies having elections within a period of 12 months in a context of more U.S. engagement in Latin America.
00:03:29
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you have this confluence of local politics as well as U.S. interest in the region and geopolitics. Interesting. So now, what's ahead for 2026, Paul? A quiet year ahead? Or what are you thinking?
00:03:41
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Well, I never like to think that we're going to have a quiet year ahead in the currency market. I always think that there's something coming around the corner. I have been somewhat surprised in the last couple of months how certain exchange rates have been very, very stable.
00:03:53
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But I think we've had a
Latin America's Elections and US Midterm Implications
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very strong reminder recently about how the ugly contest amongst the major currencies started. suddenly reappeared. We're thinking about political and policy uncertainty outside the US, places like the UK, Japan, France, and that's led to some congestion in the currency market. I think that this is going to be persisting next year.
00:04:16
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There are a number of elections or potential elections that could surface that could lead to, again, more volatility and policy uncertainty, at least for major exchange rates.
00:04:27
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Other feature which I think will matter We'll come down to how the market perceives the Fed. This is the big question for me. Not only in terms of how much the Fed could be easing with regards to monetary policy, of course, who's going to be driving the bus?
00:04:43
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Who's going to be the Fed chair? Will they be conventional or unconventional? That too will be very important for the broad dollar. And of course, that's in the context of the term of the current Fed chair, Chair Powell, coming to an end next year. And I think we're all also waiting to see who the actual candidates will be, which is information which could come up in the next few weeks or at least before the year end. So interestingly, you know you've published a report looking at questions for 2026. And I thought what was interesting is that so many of the questions, and these are questions that I think you're hearing from investors, are around the political uncertainty.
00:05:26
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Do you think more so than than previous years? Well, you're absolutely right. I mean, the way that we've approached this report was to take on board what clients are asking us. And the most relevant questions ah over the last month have stood out, because that's going to be carrying on into 2026, or so we believe.
00:05:44
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And I think you're absolutely right that one of the top of mind questions or point of focus comes down to politics. Because what influenced the dollar so much this year was exactly this. It was the policy uncertainty.
00:05:56
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And as a result, you're going to have to spend more time, mental exercise that is going through, to try and navigate those uncertainties going forward. And it is going to be another important election year in the US when it comes down to midterms. And it has huge implications for emerging market currencies and also Joseph's base in Latin America. Yeah. so
Impact of US Midterm Elections on Politics and the Dollar
00:06:16
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So there's three that really stood out to me. So maybe we can just do a quick fire round on those those three questions and include both of you. So US midterm elections, of course, that's not till November of next year.
00:06:29
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Could they matter? I think they will matter. I think they will definitely matter. I think what's unclear is how the Trump administration responds with its policies going into midterms.
00:06:41
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Could they become more orthodox to appeal to a broader voter base or not? And as I said, that could have spillover effects to how to think about the broader dollar.
00:06:52
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If we're talking about a more orthodox pattern, then it would... So a more of a shift to the centre in a way. Correct. It would probably mean that the dollar is closer to bottoming. We don't have to worry about this policy uncertainty that was making us feel quite uncomfortable at the time ah in 2025.
00:07:11
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On the other hand, if we're seeing signs that it's going down a more uncertain route, then that could lead to a lot more currency volatility, but also challenging the broad dollar.
00:07:21
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And
Positive Trends from Latin American Elections
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of course, the uncertain route could involve more trade protectionism or more um active approaches towards the Federal Reserve, for example. Exactly. That's exactly it. But I think where I want to go to Joseph and say that where where the comfort zone could be is we need to identify where there are idiosyncratic stories that are not going to be held hostage to what the dollar is going to be doing as much or the policy uncertainty here.
00:07:48
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And it comes down to Latin America. And That's a good thing, not a bad thing. Over to you, Joseph. Latin America, and let's remember there are a lot of elections there next year.
00:07:59
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Yeah, exactly. I could go on for a few hours, but I don't think we held have that much time. Next time. But um look, I mean, we've been very bullish this year and there's been a few factors. Really good cyclical conditions, strong growth, disinflation. You had very high carry because central banks really focused on the goal of inflation expectations. You had reduced fiscal risks compared to previous years. We've written about this.
00:08:18
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And then, of course, elections and how that interplays with fiscal risks. And our view was that there is a trend that most of these seem to be going in a way that's market friendly because ultimately it's the same core issues, which is a lot of focus on security, focus on um particularly combating kind of international crime groups and drug trafficking. and ultimately that's also aligning with US priorities in the region. So you have this trend that's already delivered, let's say, market-friendly results in the case of the first round of the Chile presidential election, Bolivia and Ecuador, and the Argentine midterm elections.
00:08:52
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Now looking forward, we have presidential elections in Peru and congressional, which are very important for the political volatility in the last few years. Colombia, legislative in March, presidential in May, and then the big one, Brazil, next October. And as of now, we can say that polls are generally moving in the market-friendly direction for all those markets. So we think this is going to be a continued tailwind. And I think the result of Chile from last weekend is having a positive spillover effect on the rest of the region.
00:09:18
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Yeah, and interesting
Germany's Fiscal Expansion and Its Global Impact
00:09:19
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because I guess as you, you know, there tend to be shifts. So it sounds like there is a bit of a shift in a certain direction in in Latin America in terms of what we're seeing in polling so far versus a couple of years ago. And and who knows how much of that is echoed in the midterm elections in the U.S. It's not that unusual for midterms to have a slightly different outcome, of course, than the presidential election. two years before. um So that's really interesting. Another question, ah you you already mentioned the German election, but the German fiscal expansion and of course much of that is to do with increased defense spending.
00:09:55
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How important is that for the global currency markets? Well, it certainly was very influential earlier this year, as we know. I mean, it was a ah game changer in terms of recentering or correcting expectations how low Eurodollar could go to how high could it go.
00:10:11
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But I think now the expectations are running very high in terms of what this could deliver. So when you go through that idea, you come to the conclusion that there could be the risk of under-delivering.
00:10:24
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And if that happens, of course, that would be not a good thing for the euro in itself. So our economics team is looking for a modest fiscal impulse of roughly about three quarters of a percent.
00:10:36
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And that's fairly small compared to some of the very large fiscal expansions that Germany had adopted in the past. So that tells us that you know we need to be a little bit cautious about how much to to get optimistic on this story next year.
00:10:51
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It's been helpful, but expectations are already running very high, as I said. And ultimately, what will really matter is what we're thinking on the dollar and what happens in the US. And Paul,
Investor Interest in European Markets
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are investors asking you more about Germany than France or more about the UK? Like what's the European story that investors are asking you about the most? Well, that's a great question. I think it's rotating almost every week. Okay. Whatever's in the front page of the newspaper is is what people are looking at.
00:11:20
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I think there's been a a regular rotation about what's happening more in France, the UK and Japan. not the US, which is interesting. So despite we had a pretty prolonged government shutdown, I think that just naturally kicked the attention to other markets, other governments, etc.
00:11:40
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But now that the shutdown is over, we're probably going to start to have some refocus or or attention coming back to the U.S. Although, let's not forget, it might come back in January. So so
Brazil's Elections and Investment Strategies
00:11:51
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we'll we'll watch that space. Joseph, ah Latin America, of course, you've you've explained the many elections that are coming up, the general policy direction. But what is the one question that you're hearing the most? Is it about Brazil? is Is that the one that's setting the tone? Or is it about the fiscal Achilles heel, as I think you've described it for LATAM?
00:12:10
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I think Brazil is probably the most important one, given that since the polls are still fairly even, it's actually hard to price in fully either outcome right now. i think in the other markets, we could say the results are mostly priced in, let's say. For example, in Colombia, given despite a lot of fiscal risks and, you know, let's say policy volatility, the market's just looking towards elections. In Brazil, it's really hard to say with certainty right now. So we're going to see that. price But when you say that it's priced, you can still have a positive reaction by the currency still, like the case in Chile just very recently. You still saw a strong reaction for the peso to rally, correct?
00:12:47
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Correct. And you know that was a pushback we were getting from some clients. They were saying oh, the currency markets are efficient. They price these things ahead of time. And we were saying, no, no, LATAM is different, right? And we this is why we track positioning indicators so closely, because we could tell going into the election that the offshore community was long dollars to $4 billion. dollars And locals had a much higher level of FX deposit rates than they did you know in previous cycles. So we were saying, no, no, this is not priced in. You've got to be bullish on COP. And we think actually the trade still has a little bit more to go.
00:13:17
Speaker
Well, that's the lesson when you think that a lot is priced in with politics and it still comes out to surprise you. Well, I think that's a great ah way to leave it. And I think we're going to have lots to talk about next year. So thank you both so much and look forward to discussing some more possibly even answers to these questions in the months ahead.
00:13:36
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Thank you. Thank you very much. Thank you.
HSBC Research Reports and Further Insights
00:13:44
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So that was Paul Mackle and Joseph in Calcaterra here in our New York studio on the outlook for the global currency markets. It's that time of year when our analysts are putting out their year ahead reports. So if you're an HSBC client, make sure you stay on top of our latest research by downloading our mobile app.
00:14:03
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The app features all of our key reports, videos and podcasts, including a section on 2026 outlooks and can be downloaded from Apple's App Store or Google Play.
Insights on Asian Markets: 'Under the Banyan Tree'
00:14:14
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And if you're looking for the latest on what's happening in Asia, check out our sister podcast, Under the Banyan Tree, where hosts Fred Newman and Harold van der Linde put the region's markets and economics into context.
Closing Remarks and Contact Information
00:14:26
Speaker
Finally, if you have any questions or comments, please get in touch with us at askresearch at hsbc.com. That's all we've got time for today. This episode of The Macro Brief was hosted by me, Aline Van Dyne, and produced by Tom Barton. Thanks for listening, and please join us again next week.
00:15:10
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.