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UBS forecasts the EUR/USD exchange rate could reach 1.20 if universal tariffs are set at 10% and tariffs on China at 60%, driven by a faster decline in US growth and interest rates compared to Europe. Emerging market currencies have appreciated 3% against the US dollar this year but have fallen 6% against the euro, facing challenges like weaker exports and wider global credit spreads. UBS recommends buying the euro against emerging market currencies and highlights the Brazilian real, Turkish lira, and Taiwanese dollar as likely outperformers.
UBS analysts have identified the Japanese yen (JPY) as the best value currency, with a fair value estimate adjusted to 125, while the Canadian dollar (CAD) is considered overvalued at 1.52 against the USD. The Australian dollar (AUD) is viewed as undervalued, and the Norwegian krone (NOK) is more undervalued than previously assessed, though full convergence to fair value remains challenging.
USD/JPY has risen following the Bank of Japan's decision to maintain its policy and deliver a dovish outlook. Despite this short-term bounce, analysts at Société Générale anticipate gradual JPY appreciation due to ongoing safe haven demand and domestic inflows.The pair's decline has paused near the 2024 low of 139.50, with a recent higher trough at 142 indicating potential for a short-term rise towards 145.50 and resistance around 146.15/146.50. Maintaining the pivot low at 142 is essential for sustaining this rebound.
USD/JPY has risen following the Bank of Japan's decision to maintain its policy, but the long-term outlook remains bearish due to downward revisions in growth and inflation forecasts. Market expectations for tightening have decreased, reflecting a shift in interest towards Japanese assets amid ongoing economic policy uncertainty. The forecast suggests a gradual decline in USD/JPY towards 130 over the next year, with the JPY continuing to serve as a safe haven.
USD/JPY surged past 144 following a dovish Bank of Japan meeting that cut growth and inflation forecasts, increasing downside risks and lowering JGB yields. Analysts suggest the rally may extend toward 145, but anticipate increased selling pressure at that level.
The Bank of Japan maintained its short-term interest rate at 0.5% while revising down its economic growth forecasts due to uncertainties from U.S. tariffs. The central bank now expects growth of 0.5% for the fiscal year ending March 2026 and anticipates underlying inflation to reach its 2% target by fiscal 2026. Despite the challenges, the BOJ remains poised to raise rates if economic conditions align.
The Australia 200 index is up 12 points (0.15%) at 8138, continuing a six-day rally despite weak trading volumes and a slump in commodity prices. April closed with a 3.61% gain, but May typically sees a 3-5% pullback, potentially revisiting March lows around 7730. The technology sector surged 3.83%, while major miners and energy stocks faced declines due to falling commodity prices.
UBS has expressed a preference for European and U.K. stocks over U.S. equities, citing favorable valuations, policy flexibility, and macro stability. The bank notes that U.S. stocks are likely to underperform due to high valuations and economic challenges, while European GDP growth is expected to match that of the U.S. from late 2025 to late 2026. Additionally, U.K. equities are highlighted for their attractive valuations and strong yield potential.
The FTSE 100 rose 0.6% to 8,463.46, supported by a 3.0% gain in HSBC after strong first-quarter results and a new USD3 billion share buyback. BP fell 2.6% as profits nearly halved, while Associated British Foods dropped 9.2% after slashing profit guidance for its Sugar business. Economic data showed US consumer confidence at its lowest since the pandemic, raising concerns about future growth.
The US dollar's recent stabilization follows a sell-off, while gold prices are expected to remain strong amid ongoing geopolitical uncertainties and structural demand. The CIO suggests capitalizing on short-term USD strength to reduce dollar allocations in favor of other currencies, anticipating a return to dollar weakness as the Fed is likely to resume interest rate cuts later this year. Gold is projected to reach a target of USD 3,500/oz, supported by rising central bank purchases and safe-haven demand.
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