A Slight Panic Wind

The macro point

Interestingly, the panic has spared emerging market assets (stocks and currencies). On the contrary, emerging stocks are doing well in Asia and Latin America. As for the currencies of these two regions, they show impressive resilience, which is unusual during periods of risk aversion. How can this be explained? They have certainly been aided in recent days by the implementation of new American tariffs that are lower than previous ones for many emerging countries. Latin America is among the winners of the new American protectionist regime. Conversely, Europe, and especially Italy, are among the losers. Caution is necessary, however, as tariff policy can change very quickly, overnight, as we saw a week ago.

The stock market panic does not call into question the underlying trend of the “debasement trade” that penalizes the dollar in the long term. Strictly speaking, this expression refers to a loss of confidence in the currency due to an uncontrollable budget deficit. This is not the case currently in the United States. In fact, it is a rebalancing of portfolios by major global investors following an abnormal overexposure to American assets since Covid. This rebalancing has been underway for a year. In 2025, it had greatly benefited European stocks and, consequently, the euro. In 2026, flows are heavily directed towards emerging markets and Japan. Even if we do not expect a depreciation of similar magnitude to last year's dollar, we believe that the decline of the greenback is structural. For the EUR/USD, this could materialize as a peak around 1.22-1.25 this year. The level of 1.22 serves as significant resistance. It will need to be crossed to hope to go further. Some analysts have a more ambitious target of 1.30. That seems unlikely to us. It would require a severe institutional crisis in the United States, such as a formal challenge to the independence of the Federal Reserve (Fed), for that to happen. We are far from it.

In Japan, the prospect of rate cuts is rapidly receding. A week ago, the market discussed a cut as early as this month or in April. Ultimately, it's compromised. During a meeting with the Bank of Japan (BoJ), the Japanese Prime Minister was firmer than in the past on the need to act cautiously regarding the pace of rate appreciation. Unlike the Fed, the BoJ is formally independent, but it’s a different story in practice. It works closely with the Japanese government. It is therefore likely that a rate increase will be postponed to the second half of the year, as we anticipated at the beginning of the year.

Technical point

In recent trades, the euro has not benefited much from concerns about AI. In the long term, we estimate the underlying trend remains bullish for EUR/USD with a possible peak at 1.22 this year. The European currency should notably benefit from optimism about the German economy, which is finally recovering. The 1,000 billion euro stimulus plan presented in February began to be spent at the end of 2025, which is why German statistics in early 2026 are so good.

Conversely to the euro, the Australian dollar is among the winners of last week. Why? Despite a cautious approach, the Reserve Bank of Australia should continue to increase rates, as revealed in the minutes of its latest meeting. The next increase is scheduled for May at 4.1%. This is an element supporting the currency.

Announcements to follow

The stock market news around AI will likely continue to be a marker for the foreign exchange market, just like the geopolitical situation in the Middle East that needs to be closely followed after the weekend's bombings. The usual upheavals are present. But the market seems to consider that the conflict will remain contained, both geographically and in terms of duration. The American president will not jeopardize his chances of victory in the midterm elections because of a prolonged conflict.

Another point of attention this week is the American labor market. The Department of Labor report is expected Friday at 2:30 PM. It is obviously being closely watched by the Fed. The latest data indicates a worrying slowdown in job creation over the past few months. This could prompt the central bank to lower its rates as early as March.

The information presented in this publication is provided for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used as a basis or considered as an inducement to engage in any investment.