Transcript
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.
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Speaker: This podcast was recorded for publication on the 27th of February, 2025 by HSBC Global Research.
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Speaker: Hello, I'm P.S.
Speaker: Butler and welcome to The Macrobrief, our weekly look at the issues influencing financial markets around the world.
Speaker: It's no secret that shifts in U.S. policy in areas such as trade and tariffs have been driving market moves over recent weeks, including in FX.
Speaker: So today we're focusing on what continued policy and geopolitical uncertainty mean for the world's major currencies.
Speaker: To do that, I'm very pleased to welcome Dara Mar, Senior FX Strategist, back to the studio.
Speaker: Dara, welcome.
Speaker: Thanks, Mears.
Speaker: Nice to be here.
Speaker: Yeah, nice to have you back.
Speaker: So you've just published your latest FX Tactician.
Speaker: That's a publication that tends to look at the sort of slightly shorter-term drivers of currencies.
Speaker: And you talk about asymmetric upside for the U.S. dollar.
Speaker: Can we look at what you mean by that?
Speaker: I mean, firstly, the U.S. dollar has, shall we admit it, been a bit weaker than we would have expected?
Speaker: Yeah, look, there has been, let's call it a retracement in the dollar over the last couple of weeks.
Speaker: But it's significant and significant to that point on asymmetry because,
Speaker: Really what we had argued previously and still maintain is that the US trade policy and uncertainty around that creates some additional potential for dollar upside, right?
Speaker: And for the most part, the market agreed immediately after the US election.
Speaker: We saw the dollar strengthen more than you would have anticipated given what was happening in interest rates.
Speaker: So there was some kind of unexplained extra bit of juice in that dollar.
Speaker: That juice has kind of come out of the equation.
Speaker: And our suspicion is that it's because of
Speaker: I will describe it as complacency in the market about where President Trump's tariff policy ultimately will finish up, right?
Speaker: There is this sense that everything's been delayed or it's been reviewed, etc., etc.
Speaker: What is turned into, though, is that dollar juice has come out, that premium has come out of the US dollar relative to rates.
Speaker: Now, of course, what that means from here is if we do get tariffs or if the language becomes more hawkish from President Trump around trade, you've got to start putting that premium back in.
Speaker: That's what creates the upside for the US dollar.
Speaker: Yes, I was going to say, what puts the juice back into the equation?
Speaker: Actions.
Speaker: Yeah, but are we expecting any in the near term?
Speaker: We've got a few deadlines coming up, and that's key.
Speaker: March 4th is one of them.
Speaker: We've got mid-March deadline, March 4th being for Mexico and Canada potentially getting 25% tariffs.
Speaker: That's chunky.
Speaker: We've got steel and aluminium mid-March.
Speaker: We had President Trump recently talking about copper.
Speaker: The list is getting longer, semiconductors, etc.,
Speaker: And then we have the big April 1st review that he announced back on Inauguration Day of basically trade policies with everyone in the world.
Speaker: Where do they stand?
Speaker: What should we do?
Speaker: How should we react?
Speaker: So, yeah, there's a lot of dates, triggers, catalysts that potentially come up.
Speaker: And if any of them really signal, as I say, that hawkishness,
Speaker: dollar rallies.
Speaker: If they don't, well, you know, the dollar doesn't have any premium in it.
Speaker: So it's not like the dollar is going to fall if Trump is still sounding conciliatory.
Speaker: So hence the asymmetry.
Speaker: And just to sort of summarize, would it be fair to say that you think the markets have become a little bit too complacent about some of these tariff announcements?
Speaker: I mean, I think so.
Speaker: But we'll say that because we're dollar bulls, right?
Speaker: So the markets will say we're justifiably reflecting what we're hearing.
Speaker: But I think the market has been a little bit selective in how it's been interpreting headlines coming out on this topic.
Speaker: And so it leaves it vulnerable.
Speaker: And comforting for us is the fact that that complacency creates that extra upside for the U.S. dollar.
Speaker: So looking at currency pairs, which are the ones that you think have been most effective?
Speaker: Well, certainly the ones that are most vulnerable are currencies like the Canadian dollar, right?
Speaker: Because it's got a deadline coming up pretty soon, March 4th.
Speaker: So that 25% tariff on Canadian exports to the US would have a very big impact on Canada's economy.
Speaker: The Bank of Canada pretty much said we would go straight into recession, right?
Speaker: That's a headache for the Canadian dollar, potentially.
Speaker: And I guess a currency like the euro, and you might say, well, it doesn't seem to get talked about so much as Canada.
Speaker: You know, he's not suggesting Europe should become the 52nd state.
Speaker: But the reality is that Europe's economy really does not need another headwind on the activity front, right?
Speaker: And a tariff on European exports, whether it's this reciprocal idea or directly targeting certain goods coming out of Europe, autos being a key one,
Speaker: Yeah, all of that could just be awful timing for a European economy that's kind of on its knees already.
Speaker: It doesn't need a trade fight with the US on top of everything else that it's trying to cope with.
Speaker: Actually, as we speak, we've just had the results of the German election.
Speaker: Any impacts there in terms of the euro?
Speaker: Well, we've seen kind of a couple of elements on politics come in to help the Euro of late.
Speaker: One is the German election, the sense, well, look, we only got to potentially we'll have a two-party coalition, which is better than a three-party coalition.
Speaker: Not great, but two is better than three in this instance.
Speaker: And I think hope for some perhaps movement on the fiscal policy in Germany.
Speaker: We also, of course, in the background have...
Speaker: the peace dividend, as the markets like to call it, around Ukraine.
Speaker: We have to see, of course, how that all plays out.
Speaker: Both of those elements have helped the euro against the US dollar.
Speaker: How durable they will prove?
Speaker: Time will tell.
Speaker: But I think the focus will move back to tariffs, if that's where the conversation is at, and the focus will move back to economic data, relative economic performance, as the key driver.
Speaker: Now, sitting in London, I have to ask you about sterling.
Speaker: Where do we stand on that currency?
Speaker: As grey as the weather.
Speaker: Yeah, it's...
Speaker: It has kind of some European flavor to it.
Speaker: You know, it's an economy that is struggling to grow.
Speaker: It's an economy that still has some sticky patches of inflation, which creates a dilemma for the Bank of England.
Speaker: And if you like, how much can it help activity without wondering whether it's stoking inflation?
Speaker: So that is a problem.
Speaker: Obviously, also fiscal policy, a big focus in the UK.
Speaker: You know, how much headroom we keep hearing does Chancellor Reeves have?
Speaker: And we, of course, got the UK budget coming up in pretty much months time.
Speaker: So...
Speaker: Sterling has a lot of headaches and trade, I guess, in the market's mind, hasn't been right at the forefront of that conversation.
Speaker: But, you know, UK is not immune to President Trump's aspirations.
Speaker: UK has VAT, which which, you know, President Trump does not like.
Speaker: So reciprocal tariffs, definitely an additional potential threat for sterling.
Speaker: We basically view sterling as rather rich at these levels.
Speaker: Yeah.
Speaker: Let's shift to the other side of the globe and Japan.
Speaker: And for Japan, in your publication, you talk about a shifting narrative.
Speaker: Is that a reference to the fact that after many years we're looking at tightening monetary policy in Japan?
Speaker: And is that a change from the usual, quote unquote, safe haven narrative that is normally associated with the yen?
Speaker: Yeah, very much that.
Speaker: And look, you and I have been doing this.
Speaker: Well, let's not say how long, because this is an audio broadcast so no one can see.
Speaker: But we've been doing this a while.
Speaker: And most of our conversations about Japan would always be about deflation and zero interest rate policy and all these elements.
Speaker: Now, Japan has already begun raising rates where most of the world is cutting rates.
Speaker: So in of itself, that's significant, right?
Speaker: But we're also talking about persistent inflation in Japan now rather than persistent deflation.
Speaker: Bank of Japan's projections basically suggest, yeah, 2% inflation is pretty much here to stay.
Speaker: So really, it's a question of when and by how much in terms of further interest rate hikes.
Speaker: But what it's doing is it's lending a Japanese flavor to the Japanese yen.
Speaker: Previously, the Japanese yen was beholden to U.S. Treasury yields.
Speaker: It was just the flip side to the dollar sentiment.
Speaker: Whereas now we can talk about the differential where the Japanese leg of that rate differential actually is a meaningful part of the equation.
Speaker: That is a big shift in narrative.
Speaker: Yes, as you say over the years, it's incredible to think that we are finally in that kind of a position with Japan.
Speaker: Looking at other currency pairs, are there any that you would highlight?
Speaker: I mean, talking about safe havens, what about the Swiss franc?
Speaker: Yeah, I wonder how safe it's feeling at the moment.
Speaker: You know, we've got President Trump talking about tariffs on pharmaceutical products and Switzerland's right up there on that one.
Speaker: I think we're generally quite bearish, pessimistic on that currency.
Speaker: Most of it has actually been driven by our view on the SMB.
Speaker: The SMB does not want to raise rates.
Speaker: It's a Swiss national bank.
Speaker: It's a Swiss national bank, yes.
Speaker: So the central bank of Switzerland, they want to cut rates potentially more if they have to.
Speaker: They're not averse to the idea of having negative rates in Switzerland.
Speaker: Remember them?
Speaker: Negative rates.
Speaker: Yeah.
Speaker: They're not averse to the idea.
Speaker: They're not keen to go that way.
Speaker: But they certainly do not want to have a strong currency, an excessively strong currency that makes inflation fall even further below target.
Speaker: So I think they're kind of anti-Swiss franc strength and they're ready to cut rates.
Speaker: So you put those together.
Speaker: If you layer on pharmaceutical tariffs on top, then you have a number of headaches for the quote-unquote safe haven Swiss franc.
Speaker: So I know we talked about the FX tactician, but perhaps we could just finish by looking slightly further out.
Speaker: Firstly, how concerned are you that inflation seems to be picking up in the US?
Speaker: Well, it depends how you view it, right?
Speaker: To the Fed's mind, it's something we can assess, unpack and see how it evolves.
Speaker: And they have the luxury of doing that because the economy itself is doing OK, right?
Speaker: The labor market isn't falling out of bed.
Speaker: The economy is kind of trundling to 2.5%.
Speaker: So they have the luxury of waiting.
Speaker: I suspect other economies are, if you like, in a less good position on that front.
Speaker: We mentioned Europe in terms of that growth, weak growth, but sticky patches of inflation.
Speaker: UK, weak growth, sticky patches of inflation.
Speaker: It's not Goldilocks, right?
Speaker: And
Speaker: So I think less concern around the U.S. on that front.
Speaker: But you know what's interesting?
Speaker: Even over this last week, a lot more conversations about U.S. economic activity and what this whole doge push for job cuts in the public sector in the U.S. might actually mean for U.S. economic activity.
Speaker: That, for me, we talked about a new narrative in Japan.
Speaker: I think I sense that that's becoming a new narrative in financial markets around the U.S. as well.
Speaker: We'll have to see how that plays out.
Speaker: And finally, I wanted to ask you this whole debate structurally, that there may be a significant increase in defense spending in Europe.
Speaker: European countries are quite constrained in terms of their budget deficits.
Speaker: How realistic a prospect is that?
Speaker: And does that have...
Speaker: some concerns for the euro and indeed for sterling?
Speaker: I think the currency market has always struggled with how to interpret fiscal policy, right?
Speaker: Monetary feels relatively simple.
Speaker: Rates go up, you buy the currency, rates go down, you sell the currency.
Speaker: That's why they pay us the big bucks here.
Speaker: Fiscal always had this ambiguity.
Speaker: Do we embrace what extra government spending might mean for the economy so we buy the currency from a cyclical perspective?
Speaker: or do we get unnerved by what that extra spending might mean for the deficit, for those that run a deficit, and therefore we sell the currency from a structural perspective.
Speaker: So there's always this tension between the cyclical and the structural.
Speaker: Now perhaps not so much in the case of Germany, right, because they're so frugal historically.
Speaker: But even there, I think the market will ponder the European fiscal story.
Speaker: As you mentioned, this lack of headroom, a growth and stability pact in the background that's constraining a number of economies.
Speaker: I think the fiscal picture in the U.S. is viewed by currency markets as potentially much more support for the U.S. dollar than prospects for fiscal policy in Europe might be for the euro.
Speaker: Now, that could change, but I would say that's kind of the current characterization.
Speaker: Well, we'll have you back in a month's time to see whether that asymmetric payoff has played out according to your expectations.
Speaker: But for now, Dara, thank you very much for joining us.
Speaker: Thank you very much.
Speaker: To finish off, here are three highlights from global research this week.
Speaker: Firstly, could AI help governments find cost-efficiency savings?
Speaker: Well, it's a bit of yes and a bit of no.
Speaker: That's according to our global economist, James Pomeroy.
Speaker: James says that on the one hand, AI could help improve productivity and speed up administrative tasks for teachers, doctors, and public servants.
Speaker: However, any gains appear relatively small when compared to the areas that AI cannot help with, such as social security and pensions, where aging population mean more fundamental changes are needed.
Speaker: Secondly, our European economics team have published a preview ahead of next week's ECB meeting.
Speaker: Fabio Balboni and Simon Wells expect the bank to cut interest rates by 25 basis points on the 6th of March, taking the deposit rate to 2.5%.
Speaker: But investors will be looking for any signs of debate on when the ECB will stop reducing rates.
Speaker: And finally, there are less than four weeks to go until the HSBC Global Investment Summit, which is taking place in Hong Kong between the 25th and 27th of March.
Speaker: Delegates from around the world will come together to hear insights into global trends from renowned experts, political leaders, and decision makers.
Speaker: For more details on that, or for any questions about anything we've talked about today, please email askresearch at hsbc.com.
Speaker: So that's all from us this week.
Speaker: Don't forget to follow the Macrobrief wherever you get your podcasts.
Speaker: Until next week, thanks for listening.
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