2026-07-06 07:02

Key takeaways The US-Iran deal and a shift in Fed messaging ended rangebound moves in many G10 FX pairs. Hawkish repricing of US rates, supported by resilient growth, is USD positive. The EUR and GBP are likely to face rising headwinds from political uncertainty and growth risks. USD: From range to rally The interim US-Iran peace agreement, alongside a shift in Federal Reserve (Fed) messaging, has disrupted the previously range-bound behaviour across several G10 currencies. The change in the Fed narrative is particularly supportive for the USD, enabling a break-out from long-established trading ranges. Reflecting this, the US Dollar Index (DXY) moved above 101 (Bloomberg, 26 June). Although easing geopolitical tensions typically reduces demand for the USD as a “safe haven” currency (Chart 1), we expect the increasingly hawkish repricing of US rate expectations to become the main driver, supporting further USD strength over the near term. Importantly, Fed policy appears to be anchored in continued US economic resilience, rather than the stagflation-style trade-offs shaping policy debates elsewhere in G10. Source: Bloomberg, HSBC EUR: Rising downside risks In Europe, dovish remarks from European Central Bank (ECB) President Christine Lagarde on 22 June likely put downward pressure on the EUR. Since the Strait of Hormuz has reopened and oil prices have fallen, our economists now expect the ECB to hold rates in 2026, rather than proceed with the two additional hikes previously anticipated. We therefore expect EUR-USD to drift lower over the coming months. While lower energy prices can be supportive for the EUR, they are unlikely to be enough to resolve wider concerns about economic growth in the region (Chart 2). Political risk could also re-emerge, with France’s April 2027 presidential election approaching and centrist parties currently trailing in the polls (Politico, 26 May). Any perceived weakening in fiscal discipline or reform momentum could raise risk premia, slow capital inflows, and add further pressure on the EUR. Source: Bloomberg, HSBC Source: Bloomberg, HSBC GBP: Political uncertainty and a softer macro backdrop In the UK, Prime Minister Starmer’s resignation has shifted market focus to the leadership contest and the policy direction of the next Prime Minister. With limited clarity, the GBP appears more exposed to downside risks than positioned for upside relief. Candidates must declare by 9 July. If favourite, Andy Burnham (Polymarket, 22 June) is unchallenged, a swift transition could see him in office by 16 July. Beyond politics, the macro backdrop is less supportive. UK-US 2-year rate differentials have narrowed sharply, from c66bp in April to roughly 0bp, reducing the carry support that has helped underpin the GBP (Chart 3). This reflects the Fed’s hawkish shift (17 June) versus a cautious Bank of England (BoE) hold at 3.75%, with our economists expecting the BoE to remain on hold through year-end. Fiscal optics have also deteriorated, with government borrowing exceeding the UK Office for Budget Responsibility’s (OBR) forecast for a second consecutive month. All these factors are likely to weigh on GBP in the months ahead. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-outperforms-eur-and-gbp-struggle/

2026-07-06 07:02

Key takeaways USD-JPY is near the highest level in four decades. We think Japan’s Ministry of Finance will likely intervene at some point to support the JPY. But USD-JPY may have moved into a new and higher range reflecting both external and domestic reasons. Continued JPY weakness USD-JPY is near its highest level in c40 years. Finance Minister Katayama promptly said the authorities would “respond… appropriately at any time” and that “bold actions” are an “option” (Bloomberg). However, her language appeared less forceful than on 30 April when she stated that “we are nearing [the] time to take bold action” (Bloomberg) – comments that were followed by a sharp decline in USD-JPY later that evening. Underlying assumptions We changed our broad USD view after the 17 June FOMC meeting and now expect the US Dollar Index (DXY) to trade in a new and higher range. In line with this, we also anticipate further USD strength versus JPY through mid-2027. Our view assumes the Bank of Japan (BoJ) will avoid rapid, hawkish rate hikes, keeping nominal and real US-Japan rate differentials wide (see chart). We also expect fiscal concerns to persist as authorities use fiscal policy to curb cost of living pressures, boost investment and strengthen defence. In addition, we assume no change in resident capital flow policies, allowing retail equity outflows to continue. Finally, we think the Ministry of Finance (MoF) will continue resisting unfettered JPY depreciation. A weaker JPY remains unpopular with the Japanese public and raises the risk of renewed “triple sell” episodes across JPY, equities and bonds. That said, the MoF’s tolerance for further weakness appears to have shifted slightly higher. Source: Bloomberg, HSBC Higher intervention threshold We see several plausible reasons for this slightly higher bar for intervention. The short-term “fair” value of USD-JPY, based on its correlations with underlying variables including the broad USD trend, has likely shifted higher alongside the recent rise in the DXY. Lower oil prices also reduce the urgency to curb imported inflation compared to March-May. In addition, the MoF also typically aims to surprise the market, and past episodes suggest subsequent intervention waves can occur at incrementally higher levels (e.g. 1998, 2022 and 2024). https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-jpy-a-new-and-higher-range/

2026-07-01 07:03

Key takeaways We believe market concerns regarding mega IPOs and stretched valuations will be offset by solid earnings growth across most S&P 500 companies, supported by AI-led innovation. The more hawkish tone from the new Fed Chair reinforces our view that policy rates will remain steady through 2026 and 2027. We remain overweight on US equities and have become more bullish on the USD. In the UK, while May’s inflation figures remained above target and economic growth indicators were mixed, we view inflation risks as more balanced following the interim peace agreement. We now expect no rate hikes in 2026. Meanwhile, political uncertainty persists after Starmer’s resignation. We maintain our neutral stance on UK gilts and UK equities while overweighting 5-7-year GBP investment grade credit. Gold did not rally during the Middle East conflict and has largely moved in tandem with equities. Our analysis indicates that US yields are the primary driver of gold prices. We believe gold may remain range-bound in the near term amid elevated real yields and a stronger USD. However, demand for portfolio diversification, central bank buying and steady ETF inflows should support gold prices over the medium term. We continue to view gold as an effective diversifier against broader portfolio risks. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/a-new-fed-chair-and-a-stronger-usd-in-focus/

2026-06-30 07:03

Key takeaways ^DXY = US Dollar Index, is an index (or measure) of the value of the USD against major global currencies, including the EUR, JPY, GBP, CAD, SEK and CHF. Source: HSBC https://www.hsbc.com.my/wealth/insights/fx-insights/fx-navigator/when-a-strong-usd-returns-winners-vs-laggards/

2026-06-29 07:02

Key takeaways Amid falling oil prices but rising El Niño risks, we forecast a slightly improved growth-inflation mix, but challenges remain. The FX package will likely push the BoP into surplus, supporting the INR, and easing domestic financial conditions. We forecast rate hikes, but expect a shallow cycle; and some fiscal slippage, but not a one-for-one rise in borrowing. How resilient has activity been to the energy shock? Growth has slowed since the year began, but sectors diverge. Manufacturing and exports remained resilient as firms front-loaded production. Lower US tariffs created a window to boost exports ahead of possible Section 301 tariffs, while energy uncertainty drove inventory builds. In contrast, trade, transport and construction weakened amid higher energy costs. Which sectors will be resilient, which not? Falling oil prices and easier financial conditions (led by the RBI’s FX package) should lift FY27 GDP growth to 6.3% (6% earlier). Risks remain from El Niño-driven heatwaves hurting food output. The informal sector may suffer most, while the formal sector stays relatively resilient, supported by liquidity and personal loan growth – a split reminiscent of the post-pandemic years. Will the RBI’s FX package swing the BoP? The “all-in” FX package to attract inflows and the fall in oil prices have flipped the BoP outlook. We now forecast FY27 oil at USD85/b (USD95/b earlier), a narrower c/a deficit (of 1.7% of GDP), and a cUSD25bn BoP surplus (after two years in deficit), likely stabilising the INR. The FX package inflows are repayable; eventually ‘permanent’ FDI inflows will be needed. Will the fiscal slippage be disruptive? Fiscal costs have risen. But there are offsets too (stabilisation fund, windfall taxes, and disinvestment). The central government fiscal deficit could be 0.4% of GDP (INR1.5trn) higher than budgeted, but may not lead to higher 1-1 borrowing, given other funding options. Markets will watch for OMO sales to drain liquidity. States are near the 3% cap; spending may shift from capex to current. How high could inflation rise? Pass-through from WPI to PPI has been stronger for consumer goods, while pass-through to CPI is incomplete. Historically, firms pass through c70% of costs over 3-4 months, so core CPI should firm soon. An El Niño could lift food inflation, keeping FY27 inflation at 5.1%. Inflation could average just under 6% for two quarters from October, before settling back at 4% in 2HFY28. Will the RBI react to growth or inflation? Expect a shallow RBI hiking cycle: two 25bp hikes in 4Q 2026, taking the repo rate to 5.75%. Inflation sitting near the top of the 2-6% band for about six months is hard to ignore. But the cycle should be shallow because inflation is forecast to fall back to 4% in 2HFY28 and growth is likely to weaken from the September quarter. Before we’d even had time to celebrate the latest drop in oil prices, fears of a ‘very strong El Niño’ took centre stage. With multiple shocks hitting at once, we tackle the key questions for the economy and set out our latest forecasts. Q1. How resilient has activity been to the energy shock? Our 100 indicators of growth database shows that growth momentum has been gradually easing since the start of the year (see exhibit 1). These headline numbers, however, hide some important nuances. We find that manufacturing and exports have been remarkably resilient (see exhibit 2). Frontloading seems to be supporting growth on two fronts: One, the fall in US tariff rates on Indian exports in early 2026 (from 50% to 18%, and then to 10% when the IEEPA tariffs were struck down), and fears that they may be raised again (when new tariffs from Section 301 potentially kick in), has created a window to bunch up exports (see exhibit 3). Two, firms with access to energy have been front-loading manufacturing, given fears of energy sources drying up (see exhibit 4). This has raised output growth and urban jobs over the last few months. The June flash PMI showed a rise in the order-to-inventory ratio, led by strong domestic orders, which is likely to contribute to resilient manufacturing activity over the next few months. On the other hand, trade and transport as well as construction activity have fallen most, likely because of higher energy prices and unavailability of industrial feed (see exhibit 5). As these make up a larger share of economic activity, the latter has gradually slowed. Q2. Which sectors will be resilient, which not? Until a month ago, there were three concerns around India’s macroeconomy – high oil prices, tight domestic financial conditions, and the likelihood of a ‘very strong El Niño’. The first two concerns have eased. Oil prices have fallen (see exhibit 6). We expect the FX package announced by the RBI to attract foreign inflows (deposits from non-resident Indians, ECBs, and foreign bank borrowing) which will have to be invested domestically. Even before the inflows have begun, interest rates across a host of financial instruments are falling in anticipation (see exhibit 7). Financial conditions don’t look as tight as a month ago. On the back of this, we have raised our FY27 GDP forecast from 6% to 6.3%. Alas, concerns around the El Niño hurting growth remain strong. Our analysis shows that rising temperatures and heatwaves are far more disruptive for food production and inflation than insufficient rains . We find that the temperature spikes in El Niño years are rising with time, and are now crossing important thresholds, where they not only impact perishable crops such as fruits and vegetables, but also hardy ones like rice, wheat, pulses, edible oils, poultry, and dairy (see exhibit 8). An El Niño could shave off 0.3ppt from growth, going by previous experience (see exhibit 9). On sectoral splits, we believe the informal sector, comprising rural workers and urban informal workers, is impacted most during supply shocks. Heatwaves will impact farmers directly, and the consequent high inflation will likely impact urban informal workers, who tend to be price sensitive. Together, this group makes up two-thirds of India’s consumption pie (see exhibit 10). In contrast, the formal sector might be relatively better protected. Already we are seeing two-wheeler sales (proxy of rural and informal demand) begin to slow compared to passenger vehicle sales (proxy of urban formal sector demand, see exhibit 11). This group is not as sensitive to inflation and may benefit from improved domestic liquidity and rising personal loan growth. Indeed, corporates had resorted to domestic borrowing over foreign borrowing when the INR was weakening. As the INR stabilises and the RBI’s FX package incentivises foreign borrowing again, bank lending may pivot away from corporates towards personal loans. Q3. Will the RBI’s FX package swing the BoP? Going into the June 5 policy meeting, there were hopes that some kind of FX package which attracts foreign inflows would be announced. After all, oil prices were on the boil, it was turning out to be a third year of BoP deficit, and the INR was falling against the USD. Many options were on the table. Eventually the authorities opted for them all, in an “all-in” FX package. Soon thereafter, oil prices began to fall too. With these two back-to-back developments, BoP dynamics seem much altered. We now forecast oil to average USD85/b in FY27, down from USD95/b just a month ago. On the back of lower oil and other industrial feed prices, and steps to lower gold imports, we forecast a narrower current account deficit of 1.7% of GDP vs 2.3% forecasted earlier. Furthermore, we forecast the capital account to be higher by USD65bn than previously forecasted, leading to a BoP surplus of about USD25bn, which is broadly in line with the 10year average (see exhibit 12). No surprise that the INR has strengthened against the USD in June (see exhibit 13). Having said that it must be remembered that the FX package points to one-time inflows which need to be repaid over time. From that perspective, the economy has bought time, in which it can undertake important reforms, which attract more permanent inflows, like FDI (see exhibit 14). How the INR eventually behaves will also depend on central bank behaviour. If it buys dollars to build up FX reserves (given its short forward book), the INR may not strengthen. Yet, substantial inflows may keep it from weakening rapidly. Q4. Will the fiscal slippage be disruptive? Since the start of the energy crisis, the government has sought to cushion households and small firms through a mix of tax cuts and subsidies like oil excise duty reductions and higher fertiliser subsidies, alongside measures such as the credit guarantee scheme. Taken together, these steps are likely to create a fiscal drag of around 1% of GDP. Some of this impact should be offset by receipts and savings, including the economic stabilisation fund, windfall profit tax on petroleum related exports, higher disinvestment proceeds, and expenditure rationalisation . These offsets should help contain the net fiscal slippage to roughly 0.4% of GDP (INR1.5tr, see exhibit 15 for details). We therefore expect the Centre’s fiscal deficit to widen to 4.7% of GDP versus the budgeted 4.3%. Bond markets are likely to scrutinise government finances more closely in 2HFY27 when the fiscal consolidation narrative comes back into sharper focus. Even so, we don’t expect a slippage of INR1.5trn to translate into higher market borrowing one-for-one, given alternative funding channels such as the small savings fund and higher T-bill issuances. The attention, instead, may move to the role of the RBI, and whether it will do OMO purchases following the large purchases last year (see exhibit 16), or pivot to OMO sales, to take out some of the excess liquidity following the FX package-induced inflows At the state level, the fiscal deficit (excluding the centre’s capex loans) has already reached the 3% ceiling in FY26, leaving limited room for further slippage. That said, the composition of spending could shift, with a tilt towards current expenditure at the expense of capex (see exhibit 17). Q5. How high could inflation rise? India’s inflation landscape has received a meaningful data upgrade with the rebasing of the CPI and WPI series, alongside the introduction of an output PPI. The 9%+ inflation for both PPI and WPI in May points to elevated price pressures at the producer and wholesale levels, driven largely by higher fuel costs (see exhibit 18). Interestingly, the pass-through from WPI to PPI thus far, has been led more by consumer goods like electronics, furniture and apparel (see exhibit 19). CPI inflation, by contrast, remains benign and close to the RBI’s 4% target in May, suggesting that pass-through from producers to consumers is still incomplete. The PMI price indices tell a similar story, highlighting a clear wedge between rising input costs and more subdued output price increases (see exhibit 20). Our statistical work suggests corporates typically pass through around 60-70% of cost increases to consumers over roughly 3-4 months. We therefore expect core CPI inflation to firm over the next few months as second-round effects from the energy shock begin to feed through. But the inflation story doesn’t stop there. The likelihood of a ‘very strong El Niño’ will result in warmer temperatures, less rains and higher food inflation. Our research shows that an El Niño can be a lot more hurtful now than in the past as its impact is no longer confined to perishable crops like vegetables and fruits but increasingly extends to more durable staples like cereals, pulses, and oilseeds, and even livestock (impacting dairy, poultry and fishery products). At the start of the year, our inflation forecast for FY27 was 4%. The two shocks can raise it to 5.1% (see exhibit 21). We also believe that some of the El Niño pressure could be felt in the winter crop, keeping inflation elevated in the first half of FY28. We forecast CPI inflation to average just below 6% for two quarters starting October. Thereafter, we forecast inflation to average 4% in 2HFY28 (see exhibit 22). Q6. Will the RBI react to growth or inflation? Supply shocks are never easy. Eventually we believe this will be a shallow rate hiking cycle. We expect two rate hikes of 25bp each in 4Q 2026, taking the repo rate to 5.75%. The reason for hikes is inflation as the RBI may not be able to look through CPI price increases which average close to the upper end of the 2-6% target range for around six months. The reason for a shallow rate hiking cycle is also inflation, which could settle back closer to the 4% target range in 2HFY28. Alongside this, weak growth prints will also likely tie the central bank’s hands. We expect a meaningful fall starting in the September quarter. The central bank will also have to play a proactive role in liquidity management, taking out excesses induced by the FX package. There are several options available, ranging from temporary (VRRRs) to the more permanent (OMO sales, and even CRR hikes, if needed). https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/frequently-asked-questions/

2026-06-26 12:01

Key takeaways The YTD performance gap between China’s A-shares (e.g. CSI300: +8.4%) and the MSCI China Index (-15.5%) or Hang Seng Index (-10.0%) is material. The gap is even wider in the tech space. Year-to-date, the ChiNext Index, a Nasdaq-style board on the Shenzhen Stock Exchange, recorded 36.5% of return vs HSTECH’s -20.1%. While this is to some extent reflective of the structure of the global AI rally so far, the difference is amplified by China’s K-shape economic story. For that reason, we currently prefer A-shares over H-shares, driven primarily by A-share’s much larger exposure to AI-related hardware beneficiaries. Having said that, we believe it’s important to be positioned in the full-arc AI opportunity set in China, which means taking exposure to some of the large offshore listed internet and cloud players, which are critical enablers of AI transition and adoption. Please refer to the full report for details about the event and our investment view. “Overweight” implies a positive tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio. “Underweight” implies a negative tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio. “Neutral” implies neither a particularly negative nor a positive tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/chinas-bifurcated-economy-and-the-full-arc-ai-opportunity/