Bigger unknowns over the near-term to weigh in favour of the USD – HSBC

Geopolitical risk premium has already emerged but major currencies could still deviate sharply from what fundamentals can imply, amid ongoing uncertainties. Bigger unknowns over the near term should weigh in favour of the USD, in the view of economists at HSBC.

Anti-cyclical currencies, in particular the USD, performs better when the global economy is slowing

“If downside global growth risks intensify quickly, the resilience of commodity currencies could suddenly reverse against the USD, JPY, and even possibly the EUR.”

“Given the ongoing uncertainties, major currencies, including the USD, could still deviate sharply from what fundamentals can imply. The USD and NZD are slightly overvalued on the three different time horizons we consider. The GBP is the most overvalued on a short-term basis but less so on the longer-term horizons. Contrastingly, the JPY appears to be the most undervalued on all measures, and the EUR is also seen as undervalued, albeit modestly.”

“The broad USD is already overvalued but this can become a lot more pronounced in heightened times of uncertainty. In such circumstances, this would reflect an overshoot. That being said, overshoots are usually temporary. In other words, we expect the USD to remain strong over the near-term.”