A shallower easing path should support the USD via both risk aversion and rates channels – HSBC

A strong start to the year for the US Dollar is set to continue, probably supported by both risk aversion and somewhat higher yields, analysts at HSBC say.

JPY and CAD are likely to consolidate in the weeks ahead

As the gap between market pricing and central bank guidance remains wide, we expect this USD strength to continue over the near term, notably against the EUR and GBP, in addition to the risk-on currencies, like the AUD and NZD. 

Geopolitical risks will also carry scope to add further momentum to recent market moves. Beyond these global headwinds, the EUR and GBP also face domestic economic challenges, for which a ‘high for longer’ rate outlook seems unlikely to offer sustained support for these currencies.

However, not every currency is set to weaken against the USD over the near term. For example, the JPY has been the worst-performing G10 currency year-to-date, but we look for a near-term consolidation, followed by a medium-term modest recovery. We think that any hint from the Bank of Japan (BoJ) about approaching an end to its ultra-loose monetary policy could provide disproportionate support for the JPY after recent weakness. 

The CAD may stabilise against the USD, as its weakness so far in 2024 looks overdone, relative to rate differentials and risk appetite.