FX Pulse quarterly update

Summary & conclusions

USD has benefitted from the war with Iran, but we expect a resumption of dollar weakness, assuming the war ends in the near future. We think JPY will be the strongest major currency over the next year, followed by EUR.

Recent developments

Only one of the ten central banks covered in this document adjusted policy rates during 2026 Q1 and that was a tightening in Australia in mid-March. The energy price hikes during March may have made the decision easier for the RBA but it was already in tightening mode. Surprisingly, that did not help AUD over the last month, though it may have already been priced by markets, given that it was the strongest of our currencies over 3 and 12 months (see Figure 2).

Market sentiment has recently been dominated by the US/Israel attack on Iran and the effective closure of the Strait of Hormuz. One consequence has been a stronger US dollar, which we think is related to the energy independence of the US (see Figure 4). On that basis, the best placed among our selection of economies are Australia and Canada, though their currencies don’t seem to have reaped the benefit over the last month. Also interesting, is that CNY was even stronger than USD during March. 

Though 3-month rates have fallen in most of our sample of countries during the last 12-months (except Australia and Japan), rates were largely up during Q1 (except Hong Kong and the US), perhaps reflecting a belief that higher energy costs will lead to more hawkish central banks. Rate spreads versus USD increased during Q1 in all cases, except for HKD. Hong Kong rates are further below US rates than usual (see Figure 3), perhaps explaining why HKD is approaching the lower limit of its allowable range versus USD. 

Yield curve steepening over the last year has been accentuated in many countries by a rise in longer term rates (10-year yields rose in seven out of 10 of our sample of countries, exceptions being China, Switzerland and Hong Kong). Japanese yields led the way, with a rise of 87 basis points (bps), 28 bps of which came during Q1 (the only reductions in 10-year yields during Q1 came in China and Hong Kong). 10-year spreads largely moved against USD over the last 12 months, though the picture was mixed over 3 months.

Along with USD, the other currencies to strengthen during Q1 were AUD, CNY and CHF, perhaps helped by the belief that central bank rates couldn’t fall much further (PBOC and SNB) or that rates would rise (RBA). 

The weakest currencies during Q1 were CAD, JPY and HKD. CAD seems to be suffering from the damage wrought by tariff uncertainty and hasn’t so far gained any benefit from Canada’s energy independence. In the case of JPY, the reliance of Japan on energy from the Middle East may have added to pre-existing frustration at the slow pace of BOJ normalisation (and a Prime Minister that favours a dovish BOJ).

Over 12 months, AUD, CHF and EUR have been the strongest. We think AUD has benefitted from the relative hawkishness of the RBA, while we think CHF has strong fundamentals (and a central bank that has already curt rates to zero). EUR strength could reflect optimism about future European growth (on the back of increased military spending and German infrastructure spending), but we think that may dissipate if the Middle East conflict does not come to a rapid end.

The weakest of our currencies over the last 12 months were JPY and USD. The bearish sentiment toward JPY has already been covered above. As for USD, we think the previous weakness reflected a combination of expensive valuations and poor fundamentals (see Figure 3), along with uncertainties resulting from White House policies and the feeling that the Fed had more easing to do than other central banks. The extent to which that has been reversed will depend upon the duration of the Middle East conflict, in our opinion.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.