Bank of Korea Nominee Shin Hyun-song Calls for Flexible Monetary Policy Amid Iran War Risks 
Morgan Stanley: Fed Rate Cuts Still on Track Despite Oil-Driven Inflation 
Strait of Hormuz: why even neutral and distant countries like Switzerland can’t escape the fallout 
South Korea Central Bank Signals Cautious Policy Amid Inflation and Middle East Tensions 
Bank of Japan's Ueda Flags Low Real Interest Rates as Key Factor in Rate Hike Timing 
RBNZ Holds Rates at 2.25% as Middle East Conflict Fuels Inflation Concerns 
Bank of Japan Eyes Further Rate Hikes Amid Middle East Tensions and Inflation Pressures 
Citigroup Delays Fed Rate Cut Forecast Amid Strong Jobs Data and Inflation Concerns 
Crypto tolls in the Strait of Hormuz shows why bitcoin thrives in times of crisis 
Iran’s AI memes are reaching people who don’t follow the news – and winning the propaganda war 
The USD index has set a new low for the year having dropped 1.25% on the Fed’s caution. Not only that, the dollar has now retraced over 60% of the entire Trump rally, which goes a long way to validating a key assumption in our forecast this year which is that tighter US monetary policy is not a sufficient condition to extend an already mature rally in a structurally overvalued dollar.
The pressure on the dollar from the Fed is liable to be compounded by the re-think about European political risk which was underway before the Dutch election and then sustained by the failure of the right-wing populists to make their electoral mark. This fading of interest rate and political tail risk should manifest itself both in continued outperformance from high-beta and high-carry currencies (EM and non-oil commodity FX) as well as a creeping recovery in Europe/USD in line with improved macro performance in the region and less hostile ECB policy.
The dollar’s growing discount to interest rate spreads (now at 2.3%) provides a hint of the potential pressure on broader US capital outflows and the dollar if investors get more comfortable positioning for superior growth outside of the US (and less anxious that US trade policy will disrupt this).
To reflect this changing balance of risks we are adding some modest outright pro-risk exposure to the portfolio in addition to largely neutralizing the small net USD long and increasing implicit exposure to the European recovery. To gain exposure to growth and carry dynamics in G10 we buy AUDCAD in cash and close a long-standing risk-hedge in AUDJPY at a loss.
We stay long USDCAD for now, as CAD has over-reacted to the move in US rates and is now 1% undervalued, but this is hedged against the risk of a deeper setback to USD by the long position in AUDCAD (AUD would continue to outperform CAD in a falling USD environment). While many EM currencies are too overvalued to own, ILS is one where idiosyncratic factors should compensate (external imbalances, bond index inclusion) and justify further advances. We sell EURILS.
