The recent inauguration of Donald Trump sparked notable shifts in the G10 currency market, primarily due to the revelation of a potential delay in tariff implementation, as reported by the Wall Street Journal. This development prompted a relief rally against the US dollar (USD), suggesting that market sentiments were easing concerning the geopolitical and economic uncertainties that had been previously prevalent. As investors reevaluated their positions, attention turned towards various currencies, particularly focusing on their short-term valuations and the inherent risks posed by tariff policies.
UBS strategists undertook a rigorous analysis of the currencies that exhibited significant misalignment with their fair values at the commencement of the inauguration week. The Euro (EUR), Australian dollar (AUD), and New Zealand dollar (NZD) were pinpointed as the most notable examples, with estimated fair values at approximately 1.0450, 0.6400, and 0.5750, respectively. The strategists suggested that while the Euro appears poised to reach its immediate target, the potential for substantial recoveries in the commodity-related currencies remains questionable. This skepticism can be attributed to the enduring weakness in China’s economy, which has a direct impact on these currencies.
Interestingly, UBS highlighted that the level of long USD positions was not excessive, apart from the Canadian dollar (CAD), implying that significant corrections for the Euro and Japanese yen (JPY) were unlikely in the near term. This suggestion that the pullbacks in the USD could represent favorable buying opportunities has significant implications for traders and long-term investors, who may want to balance their portfolios amidst fluctuating currency valuations.
Attention is also drawn to the imminent Bank of Japan (BoJ) meeting scheduled for January 24, where a potential interest rate hike of approximately 25 basis points is anticipated. Despite these expectations, UBS warns that such an increase may not deliver substantial gains for the yen, particularly given the global trend of monetary policy easing. This delicate balancing act underscores the complexity of currency trading strategies in the face of evolving economic indicators and geopolitical landscapes.
In assessing the Euro’s performance, UBS acknowledged its surprising resilience, particularly in light of its relatively weak economic fundamentals. This strength can primarily be attributed to a robust Balance of Payments surplus and a consistent influx of foreign bond investments. However, the risk associated with these investments is amplified by political uncertainties in France, which could dissuade foreign investors, especially from Japan, if the trend continues. Moreover, the European Central Bank’s ongoing rate adjustments add a layer of complexity, suggesting that the attractiveness of Eurozone yields may warrant close scrutiny by global investors looking for stable returns.
As the currency landscape responds to the geopolitical changes ushered in by Trump’s inauguration, investors are advised to remain vigilant. Keeping abreast of economic indicators, central bank decisions, and geopolitical developments will be crucial for navigating these tumultuous waters ahead.