Chaos in the Currency Market

The macro point

Busy week for emerging currencies. The Turkish lira continues to be shaken despite central bank interventions as investors worry about the rule of law in the country. But the most significant turmoil is in Asia. Earlier this year, we warned against a semblance of a currency war in Asia. It's happening. The strength of the US dollar poses a problem for many countries in the region. Last week it was Indonesia. On the March 25 session, the Indonesian rupiah plummeted to 16,642 against the dollar – its lowest level since the Asian crisis in 1998. Since the beginning of the year, the currency has lost nearly 3% of its value – one of the worst performances among emerging countries. The central bank was forced to intervene urgently in three markets: the forex spot, domestic non-deliverable forwards, and bonds to stabilize the currency. This shows how severe the crisis is. It is certain that more interventions will be necessary in the days and weeks to come. The Philippines, India are among the other major countries in the region facing similar difficulties.

A decline in the dollar, which is actually desired by the White House, would not be bad news for these countries. The Dollar Index has indeed receded in recent months due to the trade war. But this decline mainly occurred against major currencies. Conversely, the greenback still plays its role as a safe haven in times of uncertainties against emerging currencies. We struggle to see what might reverse this trend.

Regarding statistics, last week was rather calm. The money market estimates there is a 90% probability that the US Federal Reserve will keep rates unchanged in May. This is also our view. It is unlikely that the Fed will act until it has better visibility on the economic impact of tariffs. It's known to be negative for growth and inflationary. But once said, it's very difficult to quantify since consumers and especially companies adapt to tariffs. This was the case with China. Companies implemented bypass measures to avoid US tariffs against China that were introduced during Donald Trump's first term. Caution is needed regarding the growth trajectory. The key at this point is to understand how significant the economic slowdown will be – a recession is out of the question.

Technical point

In the foreign exchange market, the euro remains structurally supported by capital inflows into European stocks. The performance gap between these and American stocks reached a record level in the first quarter. Be careful, there will sooner or later be a return to American stocks that have now become affordable, which will be to the detriment of the euro. This could happen as soon as the next quarter. So one must be cautious about the euro's resilience. It is probably not sustainable. We confirm our target for EUR/USD at 1.0650-1.07.

As for the British pound, the trend remains bullish against the euro. The British currency continues to be supported by good economic prospects in the United Kingdom. The latest inflation and wage increase figures open the door to a rate cut by the Bank of England in May – it's already priced into the market.

Announcements to follow

The market will obviously watch the US employment figures for March. However, they should have little immediate impact on US monetary policy and the dollar.

The real point of attention this week will be "Liberation Day". It's tomorrow. President Donald Trump announced the introduction of new reciprocal tariffs. Ultimately, they do not apply to all countries. They will specifically target the 15% of countries considered most problematic in terms of trade. In other words, the European Union, Mexico, Japan, South Korea, Canada, India, and China. This is a more targeted approach but will continue to increase volatility in financial markets. Retaliation measures should obviously be expected. The European Union has already announced that measures will be implemented by mid-April, without revealing details. China and Canada, locked in a standoff since late January, should do the same quickly. We believe that Asian countries will take a more measured approach, aiming primarily to negotiate rapidly with Washington. Take India, a country facing the collapse of its currency cannot afford a trade war. As for Japan, it is highly dependent on the Americans militarily, so the archipelago has every interest in adopting a collaborative approach. What is certain is that volatility will remain at abnormally high levels, complicating the task of companies facing an increasingly complex exchange rate risk to analyze.

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