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The global capital markets will enter May with a sense of transition rather than resolution. Neither the Federal Reserve, nor the European Central Bank or the Bank of Japan meet in the month ahead. The market is inclined to see the third consecutive hike by the Reserve Bank of Australia but the other G10 central banks that meet in May, Norway’s Norges Bank and Sweden’s Riksbank are mostly likely to stand pat.
The aggressive tightening cycle that investors had penciled in during the first part of the Middle East war has been unwound, though not completely. Markets have been forced to recognize that the inflation threat is not over. The March readings were firm, and the April reports are unlikely to offer relief. The spill over into core prices is becoming more visible, which complicates the narrative.
The geopolitical backdrop has shifted but not settled. The war in the Middle East is unresolved, and the disruptions are multifaceted and will linger. Shipping routes, insurance costs, and regional supply chains will not snap back quickly. The regional geopolitics will not return to status quo ante. Pakistan is a nuclear power, and its regional role has increased. US bases were once seen as protection and may be re-evaluated.
Federal Reserve in Flux
Chinese Restraint
The Way Forward
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Economic Calendar
- May 1: India Holiday, EMU Labor Day
- May 1, 4-5: China Holiday
- May 4-6: Japan Holiday
- May 4: UK May Day
- May 5: Reserve Bank of Australia
- May 7: Sweden’s Riksbank; Norway’s Norges Bank; Mexico Central Bank
- May 8: US Employment
- May 10: China CPI and PPI
- May 12: US CPI; India CPI
- May 13: EMU Q1 GDP
- May 14: UK Q1 GDP
- May 14-15: Trump-Xi Summit
- May 18: China April Macro Data; Canada Victoria Day
- May 20: UK CPI
- May 25: UK Bank Holiday, US Memorial Day
- May 27: Reserve Bank of New Zealand
- May 28: India Holiday
- May 29: India Q1 GDP
Bannockburn’s World Currency Index, a GDP-weighted basket of the currencies of the dozen largest economies, recovered from its nearly 1.5% loss in March. That was its first monthly decline since last October and its largest drop since the end of 2024. It rebounded by about 1.35% through April 24. The recovery reflected the fact that all of the components of the index, but the yen appreciated against the dollar. BWCI reached its best level since September 2024.
The Australian dollar fared the best with the G10 members of the index and rose by about 3.3%. It has been supported by the rate expectations and commodity exposure. Sterling was second best with around a 2% gain, followed by the Canadian dollar’s 1.7% rise. The yen slipped by about 0.5%.
Among the emerging market currencies in Bannockburn’s World Currency Index, the Russian ruble’s almost 8% surge stands out. It fell 5.3% in March. The US has allowed more Russian oil to be bought, for which it is securing higher prices. The central bank delivered its fifth consecutive rate cut on April 24 (benchmark rate now stands at 14.5%, and additional cuts are likely). The ruble’s weight in the BWCI is modest at about 2.4%. The Brazilian real, Mexican peso and South Korean won rose 2.8%-3.2%, and together account for about 6.5% of BWCI. The Indian rupee rose by 0.6% and the Chinese yuan rose by 0.9%. Together they account for around a quarter of the index.
We are not persuaded that the new high in BWCI signals a breakout. The fog of war continues to cast a heavy pall over the investment climate and risk appetites. The US continues to bring more people and equipment into the region. The US with its energy supplies, record exports of petroleum products, and more flexible institutional arrangements facilitates a relatively resilient economy. The April retreat in the greenback after the March rally leaves somewhat oversold as the month winds down. Consolidation or a dollar recovery looks likely before the medium-term downtrend resumes.
Compliments of Bannockburn Capital Markets – a member of the EACCNY