Risk appetite improves with FX largely unmoved

USD: Specific factors drive certain G10 currencies

Japan equities have rebounded along with precious metals and European and US equity futures are higher with the return of moderate risk appetite partially helped by positive news in US / Iran negotiations. The underperformer in G10 FX this morning is clearly NZD that took a hit following the RBNZ meeting today that included a communication indicating continued monetary accommodation “for some time”. The RBNZ projections indicated a possible rate hike by year-end but Governor Breman was cautious on signalling any intent with the economy in the “early stages of recovery”. After a near 9% gain in NZD/USD in the last three months, the time for some retracement and consolidation looks to have arrived. As we mentioned here yesterday, the same can be said for AUD/USD after a near 10% gain with long AUD positions amongst Leveraged Funds the most stretched (by our measure) on record.

UK inflation data for January has just been released in the UK and the data has come in a touch stronger although the miss versus consensus is unlikely to be enough to prompt any notable FX or rates move. The YoY headline CPI rate dropped 0.4ppt to 3.0% as expected but the core and services CPI rates were both 0.1ppt higher than expected (at 3.1% and 4.4% respectively). But the disinflation momentum is still evident in today’s data and after the weak jobs data yesterday we would still argue that the BoE is on course for cutting by 25bps in March. Today’s data is important in that context as the February CPI data is released later than usual (on 25^th March) and therefore will be after the March MPC meeting (on 19^th). The jobs data will be released on the day of the MPC meeting although a vote and decision is often agreed the day before. But access to the jobs data will likely be made available. Still, with this the last CPI print before that meeting, the YoY services CPI at 4.4% is well above the BoE’s projection of 4.1% providing continued evidence of sticky underlying inflation. Pricing for a 25bp cut at that meeting could well slip a little after this CPI data which should provide some support for the pound after the sell-off yesterday. We are though maintaining our view that there is enough data available to justify a cut in March.

The minutes from the FOMC meeting in January will be released this evening. The FOMC left policy on hold with Miran and Waller dissenting for a 25bp cut. The statement referred to “some signs of stabilization” in the unemployment rate so we should see signs of some optimism that suggests the FOMC is content for now with maintaining a level of moderate restrictiveness. We don’t expect any surprises and see limited market impact. We had a couple of interesting comments from Fed officials overnight with Governor Barr and SF Fed President Daly both suggesting the potential need for higher rates due to AI that points to potential conflict with incoming Fed Chair Warsh who has argued AI is a reason for lower rates.

UK SERVICES INFLATION IS FALLING, BUT VERY SLOWLY

Source: Bloomberg, Macrobond & MUFG GMR

EM FX: Outlook remains favourable

Geopolitical risks look to have possibly receded following news that the indirect talks between the US and Iran in Geneva yesterday. The Iranian Foreign Minister Abbas Araghchi stated that Iran had reached a “general agreement” on a potential nuclear deal that would ease sanctions and reduce risks of war in the region. There remains a high degree of scepticism over how realistic that scenario is and the drop in crude oil prices have been relatively modest.

If it does result in a warming of relations it would be another factor that can help support global sentiment and would reinforce the prospect of EM FX continuing to perform well. We are generally constructive on EM FX this year and are forecasting some notable gains in certain EM currencies this year. LatAm FX is leading the way so far in 2026 and BRL and MXN are the top two performing EM currencies on a year-to-date basis. There are a number of global macro factors that should prove supportive for EM FX and then certain specific factors. The outlook for global growth this year looks reasonable and if our assumptions are realised will be supportive of continued positive carry momentum. Firstly, we see it as very unlikely that President Trump will increase the average effective tariff rate this year – it’s an election year with the mid-terms in November and getting the cost of living lower into the election will be a priority this year. An Ipsos/Reuters poll in December revealed that 56% of respondents disapproved of Trump’s handling of the cost of living. Polls in general suggest the Republicans will lose the mid-terms and Trump will likely be focused on altering that outcome – lifting tariffs further is not the way to go.

Secondly, fiscal stimulus in key economies this year will be supportive for global growth. The US, China, Germany and Japan will all increase spending. Thirdly, two years of monetary stimulus in most major developed economies will help support demand in 2026 with the US and the UK still set to ease further.

These factors will all help provide support for EM FX. Furthermore, inflation remains a key factor driving positive investor sentiment in EM. Annual inflation in Mexico has been below 4% (the top-end of Banxico’s inflation target range) for all of 2025 bar two months which is the longest period since 2015-16 when the covid period is excluded. In South Africa inflation has also been below 4% for the longest period since 2004-05, again when the covid period is excluded. Inflation is low in Chile, trending lower in Brazil and low across much of Asia. In a world when investors are more focused on inflation risks, this is a key positive for EM FX.

Out top picks in EM this year include ZAR and CLP (close to 7% gains by year-end) while MYR and KRW are set to gain by around 5% and should be helped in the Asian region by a recovery in JPY and further moderate gains for CNY.

FX & BOND MARKET VOLATILITY TRENDS REMAIN CONDUCIVE FOR POSITIVE EM FX PERFORMANCE

Source: Bloomberg & MUFG Research

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com