Forex News

National Bank Canada's (NBC) Stéfane Marion and Kyle Dahms observe that the Euro has softened alongside the broader USD rally, even as Eurozone inflation has reaccelerated and pushed the ECB toward a more hawkish stance. They see EUR/USD mainly as a Dollar story, targeting 1.19 by year-end from 1.16 currently, with upside constrained unless Eurozone growth and rate spreads move more decisively against the Dollar.

Euro outlook hinges on USD path

"The euro has softened with the broader USD rally, even as the Eurozone inflation backdrop has turned more challenging for the ECB. Headline inflation rose to 3.2% y/y in May, while core inflation moved to 2.5%, leaving both measures uncomfortably above target and pointing to a more persistent inflation problem than policymakers would like."

"We therefore see the euro’s path as mostly a USD story. Our year-end target is 1.19 for EUR/USD, compared with 1.16 currently. That is not a strong euro exceptionalism call."

"It is a view that the broad dollar should moderate as Fed repricing matures and the second-half depreciation trend resumes. The common currency can participate in that move, but the upside is likely to remain gradual unless growth improves more convincingly or short-term spreads turns more decisively against the dollar."

"For the euro, however, the issue remains relative policy. A more hawkish ECB can help limit euro downside, particularly if markets continue to price some risk of renewed tightening. But it is not enough on its own to generate a sustained rally if the Fed is also being repriced in a more hawkish direction."

"In that sense, the euro’s near-term resilience shoud remain, but the case for a move toward our 1.19 year-end target still depends heavily on the broader USD moderation we expect in the second half."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Rabobank's Senior FX Strategist Jane Foley discusses how prospective Bank of Japan (BoJ) policy shifts on JGB purchases and rate hikes could influence the Japanese Yen (JPY). Foley highlights Nikkei stories on a possible 25 bps hike and a pause in tapering from April 2027, notes domestic and overseas demand for JGBs, and projects USD/JPY reaching 158 in three months, assuming further BoJ tightening.

BoJ tapering pause and rate risks

"The Nikkei newspaper is reporting that the BoJ is set to hike rates by 25 bps at its forthcoming policy meeting. This aligns with the market consensus. Additionally, the newspaper reports that the central bank “is also considering pausing the tapering of its government bond purchasing program, starting in April 2027”."

"More stabilisation in the JGB market is likely to lessen potential volatility in the JPY."

"According to the BoJ, at this point the Bank’s holdings of JGBs will have reduced by around 16-17% as a result of the tapering policy. According to the Nikkei newspaper, the BoJ is considering pausing repurchases at these levels from April 2027. This comes against the backdrop of concerns within the JGB market that the BoJ may be falling behind the curve on inflation and that fiscal stimulus could impact supply."

"By pausing tapering at current levels, the market should have more time to find its equilibrium, which should create some stability, assuming JGB supply is not increased significantly. This should lessen risk of bouts of JPY volatility."

"This means that in order to support the JPY, the BoJ may have to signal a potentially accelerated pace of rate hikes at its June policy meeting. Given the headwinds to growth implied by the Iran war, it is not clear that it will be comfortable in doing so. This could leave the JPY vulnerable. Our forecast of a move to USD/JPY 158 in 3 month assumes further BoJ rate hikes this year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Societe Generale notes China’s trade surplus widened to USD 105.4 billion in May, driven by a 19.4% year‑on‑year surge in exports led by AI‑related equipment. They argue this backdrop supports CNY appreciation, though recent bullish momentum has stalled, with authorities balancing targeted easing, tighter capital controls and measures to encourage offshore retention of export proceeds.

AI‑driven exports back Yuan resilience

"In China, the trade surplus widened to a larger than forecast $105.43bn in May from $84.82bn in April. The 19.4% yoy rise in exports was AI-driven as outbound shipments of computers and parts soared 66% while sales of integrated circuits abroad more than doubled."

"The data is supportive of CNY appreciation though we have seen bullish momentum ground to a halt last week. The currency remains best-performer in Asia, acting as a regional anchor and safe haven and we are watching daily PBoC fixings closely for signals from the authorities who are balancing targeted easing with tighter capital controls."

"As flagged, regulators are nudging banks to step up USD deposit mobilisation (allowing rates above SOFR) to encourage corporates to retain export proceeds offshore and lean against yuan strength without overt intervention."

"At the same time, enforcement on cross-border flows is tightening, with reports of renewed crackdowns on illegal offshore trading, stricter oversight of unlicensed brokers, and forced closure of non-compliant accounts pointing to a clear bias toward capital retention."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Brown Brothers Harriman’s (BBH) Elias Haddad notes that USD/IDR retreated sharply after hitting a fresh record high, as Bank Indonesia delivered an unscheduled 25 bps hike to 5.50%, following a surprise 50 bps move in May. Haddad expects BI’s rate hikes and FX intervention to limit further IDR weakness, though he sees the currency remaining undervalued until the energy shock subsides.

Policy tightening and undervalued rupiah

"USD/IDR pulled back sharply after reaching a fresh record high of 18190 today. Bank Indonesia (BI) lifted the policy 25bps to 5.50% today, more than a week ahead of its next scheduled meeting."

"BI said “this increase is a follow-up measure to strengthen the stabilization of the rupiah exchange rate…”[and] “a preemptive step to keep inflation in 2026 and 2027 within the government’s target range. Today’s unscheduled rate decision follows the bank’s surprised jumbo 50bps hike on May 20."

"The rupiah is -10% undervalued relative to its real effective exchange rate trend, the most since 2009."

"BI rate hikes and ongoing FX intervention will help curtail IDR weakness. But until the energy shock fades, IDR is unlikely to correct its significant undervaluation."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Royal Bank of Canada (RBC) economist Claire Fan argues that recent contractions in Canadian GDP do not signal a recession, noting that the C.D. Howe Institute Business Cycle Council shares this view. She emphasizes that sharp swings in population growth distort traditional GDP readings. Fan highlights that per-capita GDP trends better capture household conditions and now suggest Canada is in an early-stage recovery from a soft patch.

Per-capita data reshape recession call

"Canada’s consecutive contractions in gross domestic product in recent quarters sparked some concerns about whether the economy had entered a recession."

"We don’t back that view, nor does the C.D. Howe Institute Business Cycle Council, responsible for formally dating Canadian recessions."

"A core reason for looking beyond GDP growth is the sharp swings in population growth Canada has experienced."

"Notably, the past two quarters of GDP decline both coincided with population declines—the first on record since the 1950s."

"Now the opposite is true: Headline GDP looks worse than reality, while Canada’s in early-stage recovery from a soft patch that began in early 2023."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)