2025-05-19 12:02

Key takeaways DXY is still below what its yield differential implies, but the gap is closing as trade uncertainty recedes, for now. The recovery in the USD may also have been helped by positioning adjustment. Cyclical factors could regain traction; DXY consolidation seems likely, while the AUD and NZD may strengthen over the near term. For most of 2024, the US Dollar Index (DXY) had been tracking its yield differential, but the USD developed a premium to its yield differential in early 2025 amid US growth resilience. That premium came to an end due to US trade policy uncertainty, followed by a swift swing to a USD discount since 2 April when “reciprocal tariffs” were introduced. At one point, the DXY was c7% below the level implied by its yield differential. More recently, that discount has begun to narrow (Chart 1). This started with the USUK trade deal but got real impetus when the US and China announced an official trade truce on 12 May, with big reductions in effective tariff rates for 90 days. The recovery in the USD may also have been helped by positioning adjustment, given the stretched short DXY positioning (Chart 2). Nonetheless, it seems appropriate that the discount still exists, as negotiations are ongoing with no guarantee of success. The US will also want to secure resolutions with other trading partners with whom it runs sizeable deficits, for example, the EU where the process may run more slowly, given the multitude of countries and interests in play. Progress would see the USD gain, and setbacks see it wilt. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Still, the improvement in global trade news flow may reopen the door to cyclical factors getting more traction. A pause in parts of US trade policy should also allow the Federal Reserve to extend its pause on rate cuts so long as the resilience of the labour market and inflation data cooperate. Markets also expect the Fed to keep its policy rate unchanged at its 17-18 June meeting (Bloomberg, 15 May 2025). Until then, DXY is more likely to consolidate than see a big move in either direction. De-escalation in US-China trade tensions and positive news around potential trade deals between the US and other Asian economies should alleviate pressure on the regional growth outlook and improve overall risk sentiment. As such, AUD-USD and NZD-USD are likely to edge higher over the near term. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/dxy-closing-the-gap-with-yield-differential/

2025-05-19 12:02

Key takeaways Table of tactical views where a currency pair is referenced (e.g. USD/JPY):An up (⬆) / down (⬇) / sideways (➡) arrow indicates that the first currency quotedin the pair is expected by HSBC Global Research to appreciate/depreciate/track sideways against the second currency quoted over the coming weeks. For example, an up arrow against EUR/USD means that the EUR is expected to appreciate against the USD over the coming weeks. The arrows under the “current” represent our current views, while those under “previous” represent our views in the last month’s report. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-trends/g10-currencies-when-global-trade-uncertainty-recedes-for-now/

2025-05-19 07:04

Key takeaways The past week saw the US and China agree to substantially reduce tariffs for a 90-day period while working towards a deal. Although clearly positive news, the significant changes in tariff policy since early April are likely to make interpreting macro data tricky in the coming months. When the US government announced plans for reciprocal tariffs in early April, the initial 46% levy on Vietnam (later cut to 10% while trade talks continue) made it one of the worst affected countries. With market rotations continuing, there could be a case for investors to look beyond US large-cap dominance for upside in global small caps. Chart of the week – China’s tech-led rebound Is it deal-done and crisis-averted in investment markets? Last week’s agreement between the US and China to slash tariffs for at least the next 90 days is the strongest marker yet of a shift to policy de-escalation. In truth, investors have been alert to this theme since the market recovery began in the third week of April. But last week’s price action takes US stocks decisively above their “Liberation Day” levels. Market price moves naturally reflect a shift in investors’ assessment of the risks: lower probabilities now on bad outcomes, and higher probabilities on better outcomes. Even so, it still looks like average US tariffs will settle in the low teens, the highest rate we’ve seen in the post-war period. Macro damage has already been done. And the policy outlook remains ultra-uncertain. An important theme this year has been the dramatic rotation of the market narrative. The theme has moved from a universal belief in US exceptionalism in January to a US policy induced recession and worries about economic fragmentation in early April. Now it looks like something in-between. Markets will continue to spin-around. As for China, the US talks followed a new round of policy stimulus – including rate cuts, targeted easing, credit support, and support for financial markets. Chinese offshore indices have performed well in 2025 driven by strong returns in technology stocks, which continue to be a profit engine, with firms capitalising on DeepSeek-driven AI optimism. By contrast, onshore indices have been weaker, due to lower tech exposures and slightly higher valuations. Market Spotlight Euro vision With the Eurovision Song Contest beaming live from Basel to living rooms around the world last weekend, we bring other news from Europe – but this time on proposed developments in the bond market. Recent questions over the safe-haven status of US Treasuries have been a reminder that investors face limited substitutes given that Europe's fragmented debt markets fail to offer the depth and liquidity necessary to rival Treasuries. Moreover, structural imbalances between eurozone economies cause destabilising capital flows between “core” and “periphery” nations during stress periods. The proposal for European Safe Bonds (ESBies) offers a potential solution. In technical-speak, ESBies are the senior tranche of a securitisation vehicle backed by a diversified portfolio of eurozone sovereign bonds, with the junior tranche referred to as European Junior Bonds, or EJBies. They would command enhanced safe-haven premiums through cross-European risk pooling – signalling more market cohesion and serving as a risk-free alternative to German Bunds. They could represent a way of increasing systemic resilience, while addressing the global safe asset shortage and over-reliance on the dollar – just as US exceptionalism as the sole provider of safety is under scrutiny. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg. Data as at 7.30am UK time 16 May 2025. Lens on… Hard times The past week saw the US and China agree to substantially reduce tariffs for a 90-day period while working towards a deal. Although clearly positive news, the significant changes in tariff policy since early April are likely to make interpreting macro data tricky in the coming months. The lion’s share of survey data – aka “soft data” – for April weakened on the back of “Liberation Day”. But May is likely to see some recovery, especially in the context of resurgent US equities. However, it is worth taking a step back and remembering that even after the thawing of US-China trade relations, the average effective US import tariff has still risen to a post-WWII high. Accordingly, macro models suggest US growth will drop well below trend in the coming quarters. Hence, while “soft” data may stage a recovery, “hard” data are likely to weaken, especially given investment and consumer spending was pulled into Q1 to avoid paying tariffs, likely leaving an “air pocket” in Q2. In the absence of further positive policy news, weaker “hard” data could trigger some renewed volatility in risk markets. Efficient frontier When the US government announced plans for reciprocal tariffs in early April, the initial 46% levy on Vietnam (later cut to 10% while trade talks continue) made it one of the worst affected countries. As a fast-growing Frontier manufacturing hub, Vietnam’s goods trade surplus with the US has soared in recent years (2024: USD123.5 billion). That’s been driven by its popularity with western firms pursuing a “China Plus One” strategy of diversifying their supply chains. Like other Frontier markets, ultra-high trade policy uncertainty has caused volatility in Vietnamese stocks. But the market has rebounded well, and year-to-date Frontiers as a group have returned 8.9%, outperforming both developed (3.7%) and emerging (8.5%) markets. This positive performance is down to factors including discounted valuations, strong earnings growth, and local country idiosyncrasies that offer protection against macro pressures. In the case of Vietnam, foreign investment is expected to be sticky despite recent uncertainty, with the country’s expanding middle class, digital adoption, and urbanisation giving its economy structural resilience. Thinking small With market rotations continuing, there could be a case for investors to look beyond US large-cap dominance for upside in global small caps. The US S&P 600 small-cap index has lagged the S&P 500 by over 50% over the past decade. And while investors would be forgiven for losing patience by now, history suggests smaller firms can deliver big gains after spells out of favour. Take the 1993-2000 technology bubble. After a serious bout of small-cap neglect, the S&P small-cap index trounced the S&P 500 by 75% from 2001 to 2010. Small caps have a high beta to both local growth and borrowing. While 65% of US corporate borrowing comes from capital markets, it’s only 15-20% in Europe, making those firms more reliant on bank financing. Today, many global small-cap indices trade at a discount of close to 20% versus the last decade. Non-US small caps currently trade below their average 12-month forward PEs, with Hong Kong and UK small-cap PEs close to 10x – half the S&P 500’s 20.5x. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 16 May 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 16 May 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Market review Risk-on market sentiment strengthened last week as the US and China agreed to reduce tariffs to 30% on Chinese imports, and 10% on US imports into China for a 90-day period. US markets now anticipate two rate cuts by year-end, down from nearly three the previous week. The US dollar continued its modest recovery, while US Treasuries declined, alongside similar yield rises in German Bunds and UK Gilts. US and eurozone credit spreads narrowed. US equities surged, driven by technology, with European markets following, supported by strong Q1 earnings in financials and healthcare. Japan's Nikkei 225 posted modest gains as the yen were range-bound. Other Asian indices performed well, led by India’s Sensex, followed by Hong Kong’s Hang Seng, China’s Shanghai composite, and South Korea's Kospi. In commodities, oil prices edged higher, whilst gold retreated from previous week’s gains. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/chinas-tech-led-rebound/

2025-05-14 08:05

Key takeaways The US and China agreed to big reductions in effective tariff rates for the next 90 days, as trade talks continue. The USD was notably stronger, with DXY rising past 101. Rate differentials and data releases could regain market attention amid a de-escalation in trade tensions. The high-level trade talks between the US and China on 10-11 May were constructive, and both sides issued a joint statement on 12 May, delivering a significant breakthrough in rolling back tariff levels: The US will roll back its 125% tariffs on Chinese imports announced since 2 April to 10% for 90 days. The earlier 20% tariffs imposed on China for the fentanyl issue will remain in place. China will roll back reciprocal tariffs on the US to 10% for 90 days and lift nontariff countermeasures imposed on 2 April (retaliatory measures taken in relation to tariffs imposed for the fentanyl issue will remain in place). The reduction to a 30% tariff rate for China (20% fentanyl-related + 10% baseline) was better than the 80% that US President Trump hinted at before the talks (Bloomberg, 10 May 2025). This also came alongside positive official rhetoric. It was in both countries’ interest to prevent the effective trade embargo remaining in place. The immediate market reaction saw the USD strengthen against all other G10 currencies, in particular, the low yielding, “safe haven” JPY and CHF, as global equity market rallied, US rate cut expectations eased, and FX position adjusted. Source: Bloomberg, HSBC Source: Bloomberg, HSBC It is worth noting that the AUD (and NZD) did not capitalise against the USD but did make gains vs the EUR and safe haven currencies. One could make the case that the reduction in trade tariffs would have allowed the AUD to outperform in the G10 space, given its China linkages and positive correlation with risk appetite. But the USD is capitalising on reduced trade tensions, an appropriate mirror to its weakness as trade tensions rose. It suggests the USD could gain on evidence of progress in US trade talks with China (and others) but may remain vulnerable to any setbacks. Another aspect to note is the US retention of a 10% baseline tariff on China. This echoes the US-UK trade deal and suggests a 10% baseline tariff may be here to stay, irrespective of what else the US agrees with trade partners. The US Dollar Index (DXY) has been weaker than what its rate differentials imply (Chart 2), probably reflecting market concerns over US policy and structural issues. But if trade tensions are at least temporarily relegated down the list of market priorities, rate differentials and data releases could once again see renewed traction. This cyclical factor currently suggests the DXY could go higher. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/dxy-higher-on-us-china-trade-truce/

2025-05-13 12:02

Key takeaways The temporary rollback of US tariffs on Chinese imports from 145% to 30% and China tariffs on US goods from 125% to 10% represented a substantial de-escalation of trade tensions. We estimate the 30% additional US tariffs will translate into 0.9ppt drag on China’s GDP and expect the 90-day tariff reprieve will likely boost the front-loading of Chinese exports further in the next three months. However, the tariff pause is only a preliminary deal while the upcoming trade talks will likely be a lengthy and bumpy process. Hence, we don’t expect Chinese policymakers to slow down the policy support for domestic consumption and structural reforms to bolster home-grown demand. Navigating persistent global trade uncertainty, we stay focused on domestically oriented China’s AI innovation champions, including AI enablers and adopters in the ecommerce, social media, online gaming, software, smartphones, autonomous driving, and robotics sectors. We expect the Chinese market rally to broaden out to the consumption, financial and industrial sectors in the next phase of market re-rating. We remain overweight on Chinese equities, including quality SOEs paying high dividends and remain positive on Chinese hard currency bonds. Please refer to the full report for details about the event and our investment view. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/us-china-tariff-pause-supports-de-escalation-of-trade-tensions/

2025-05-12 12:02

Key takeaways The BoE cut rates to 4.25% in May, but a surprise three-way vote split cooled market expectations for future cuts. US-UK trade deal with few details immediately announced; most UK goods exports to the US will still face the 10% tariff. The GBP’s reaction was rather muted and is likely to move sideways against the USD in the weeks ahead. The GBP weakened slightly against the USD after the announcement of a US-UK trade deal, erasing an early gain amid the Bank of England’s (BoE) hawkish cut. Unlike the Federal Reserve (Fed) that paused rate cuts for a third straight meeting, the BoE decided to lower its key policy rate by 25bp to 4.25% on 8 May. The decision came in line with market expectations, but the vote dividing the 9-member monetary policy committee (MPC) into three groups was a surprise. Five of them voted for the move, while two preferred a larger 50bp reduction and another two voted to hold rates steady. The BoE did not change its forward guidance, reiterating “a gradual and careful approach to the further withdrawal of monetary policy restraint”. The UK central bank now sees slightly weaker inflation but stronger near-term growth. Its growth forecast for this year was raised to 1% (from its February projection of 0.7%) and that for next year was lowered to 1.25% (from 1.5%), while the outlook for 2027 was unchanged at 1.5%. However, with two MPC votes for a hold and no change to the BoE guidance, the tone was a little more hawkish than expected. The GBP strengthened modestly against the USD, as markets pared some rate cut expectations (and more so after the US-UK trade deal), currently seeing only two more 25bp BoE cuts this year (Bloomberg, 9 May 2025). As for the US-UK trade deal, which US President Trump noted will be “the first of many”, its benefit and scope appear to be rather limited, with few details immediately announced. Most UK goods exports to the US will still face the 10% tariff, compared to an average tariff of 2.2% previously. For now, the trade deal includes lower US tariffs on British steel and aluminium, from 25% to zero. Other benefits include lowering the tariff on British-made cars to 10% from 27.5%, but only for the first 100,000 cars entering the US. New reciprocal market access is granted on beef, which gives UK farmers a tariff free quota for 13,000 metric tonnes and the UK removed a tariff on ethanol entering the UK from the US. There are other elements that may benefit the UK aerospace and pharmaceutical sectors, in addition to some promises to ease some non-tariff barriers with more mutual investment, but details are limited, and discussions ongoing. On a positive note, the trade framework removes some uncertainty surrounding future trade relations between the two countries which should support business investment sentiment. But until other regions, especially the EU and China, conclude their negotiations, it will be difficult to judge the deal in isolation. The GBP sees muted reaction to the trade framework with the US. Part of the explanation is that the USD is capitalising on signs that US trade policy uncertainty is declining, thereby overshadowing the relief from a trade deal that might offer to the US economic outlook. It is also possible that the GBP is being hit by other domestic headlines, with the National Institute of Economic and Social Research (NIESR) pointing to UK fiscal policy headaches ahead (Bloomberg, 8 May 2025). All things considered, the GBP is likely to move sideways against the USD in the weeks ahead. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/gbp-boes-cut-in-a-3-way-split-and-us-uk-trade-deal/