The inauguration of Donald Trump initiated a wave of optimism in global currency markets, particularly among G10 currencies, as reflected in a notable relief rally against the US dollar (USD). This sudden uptick was largely propelled by an article in the Wall Street Journal which speculated on a possible postponement of impending tariffs. Such discussions around trade policy significantly influenced market sentiment, causing investors to rethink their stances on currency valuations.
UBS strategists took a critical look at the situation using their short-term valuation models. They sought to uncover how much tariff risk had already been integrated into currency prices prior to the inauguration week. By the end of the preceding week, it had become apparent that certain currencies, particularly the Euro (EUR), Australian dollar (AUD), and New Zealand dollar (NZD), were showing signs of misalignment from their fair value estimates. Their calculations indicated that these currencies could be undervalued, suggesting a possible upward trend in the light of improving market conditions.
UBS identified the Euro as the most likely candidate to reach its short-term target based on fair value indications, while expressing skepticism regarding the potential for significant rebounds in commodity-linked currencies such as the AUD and NZD. Their hesitance was attributed to what they perceived as fundamental weaknesses—most notably the ongoing economic challenges faced by China, a critical player in the global commodities market.
Interestingly, UBS suggested that long USD positions were not excessively entrenched outside the Canadian dollar (CAD), meaning that a major correction in the Euro and Japanese yen (JPY) was unlikely in the short term. Vassili Serebriakov and his team emphasized that pullbacks in the USD could actually offer strategic buying opportunities for investors looking to capitalize on future recoveries.
As discussions around currency movements continued, focus shifted to the JPY, which was nearing a pivotal moment with an upcoming Bank of Japan (BoJ) meeting. Analysts projected an anticipated rate hike of about 22 basis points, raising questions about the potential for significant gains in the JPY even as the economy moved away from a global trend of policy easing. UBS inferred that although an increase was expected, it might not significantly bolster the JPY, reflecting the complexities of domestic monetary policy juxtaposed against international dynamics.
Eurozone Stability Amid Uncertainties
The Euro’s strength over the past two years, despite challenges posed by weak economic fundamentals, was attributed to a strong Balance of Payments surplus. This surplus has been bolstered by renewed foreign bond inflows, particularly into French debt. Nonetheless, UBS expressed caution regarding the sustainability of these flows, especially in light of political uncertainties in France and the potential for continued rate reductions by the European Central Bank (ECB).
The landscape of global currencies following Trump’s inauguration reveals intricate relationships between geopolitical events, economic fundamentals, and market expectations. Investors would do well to stay vigilant in monitoring these trends, especially as the allure of Eurozone yields fluctuates under the weight of shifting political and economic circumstances. The upcoming weeks and months will likely yield critical insights into how these dynamics evolve.