Global foreign-exchange outlook and policymaking credibility Report Interpretation

Overview

HSBC's September Currency Outlook examines global FX through policy credibility, cyclical data and structural pressures. Its central message is that the USD's recent weakness reflects a more difficult combination of weak relative data, fiscal and monetary-policy uncertainty, while the durability of recoveries in the JPY, CHF and other currencies depends on domestic policy follow-through.

Core views

HSBC frames the broad USD outlook through cyclical, structural and political/policy filters. The report says its confidence in USD strength has fallen because US data have disappointed since July while data outside mainland China have generally exceeded expectations, prompting a dovish repricing of Fed expectations relative to other major central banks. DXY has continued to track the two-year weighted rate differential, indicating diminished cyclical support. Structurally, uncertainty about the Fed reaction function and widening fiscal deficits have lifted long-end term premia; Treasury buyback operations were viewed as a stop-gap rather than a solution to fiscal concerns. Politically, JPY-buying intervention, discussion of the FIMA repo facility, sanctions risks and renewed de-dollarisation debate have added to doubts about US policy credibility. HSBC's diffusion index showed more days on which the USD depreciated against at least 90% of roughly 30 tracked developed- and emerging-market currencies. Its baseline remains a gradual USD recovery, but it calls this a pivotal point: a further deterioration across its three filters could drive the USD materially lower. For EUR-USD, HSBC argues that the recent move remains mainly a USD story rather than evidence of a decisive Eurozone revival or a strategic reallocation into euro assets. Eurozone growth has stabilised, supported by German fiscal expansion and Spanish growth, and composite PMIs surprised to the upside over the three months to August. However, the market already prices ECB tightening above 3% by July 2027, leaving the pair exposed if delivery falls short. HSBC finds no clean evidence that de-dollarisation has produced a strategic asset-allocation shift into the Eurozone: portfolio inflows have broadly been offset by other-investment outflows, consistent with rebalancing. It expects gradual EUR-USD weakening into 2027 as elevated gas prices, low storage, a renewed trade deficit, deteriorating balances with the US and China, and political risks around France's April 2027 election weigh on the euro. The report notes that EUR sensitivity to gas has historically intensified once TTF exceeds EUR70-80/MWh. A durable USD downturn, stronger Eurozone productivity and investment, or a French political path preserving fiscal credibility could change this view. HSBC sees USD-JPY as potentially at a cusp of change. The pair fell rapidly from near 160 in early September amid expectations for a more hawkish BoJ and a possible GPIF shift toward domestic assets, rather than fresh intervention. Markets price a 100% probability of a 25bp BoJ hike on 18 September and 75bp of hikes by April 2027. A more forceful anti-inflation policy, domestic-asset reallocation and a credible fiscal-consolidation plan are identified as conditions for a sustained JPY recovery. GPIF domestic-bond allocation was 25.59% at end-June 2026, versus a 25% target and a permissible +/-6 percentage-point range; because GPIF assets total about JPY320trn, a one-percentage-point shift equates to JPY3.2trn. Yet HSBC finds little evidence that the rise in domestic yields has already fundamentally changed investor behaviour. It lowers 3Q26 and 4Q26 USD-JPY forecasts to 158 and 160, from 161 and 162, while retaining 164 for mid-2027 and reassessing after the FOMC and BoJ meetings. On US midterms, HSBC does not identify a consistent historical USD pattern around previous elections. Its base political scenario is Democratic control of the House, which could create gridlock. Fiscal restraint could be structurally USD-positive if it limits further deficit expansion, but it could be cyclical USD-neutral or negative by constraining fiscal stimulus. The report distinguishes the USD's positive relationship with changes in risk-neutral Treasury rates from its inverse relationship with term-premium moves. Gridlock would not stop executive action on trade, regulation or foreign policy, and Senate control would affect appointments and institutional risks. HSBC's overall conclusion is that divided government may reduce policy noise and make the USD more responsive to traditional economic drivers, rather than providing a simple directional signal. For EUR-CHF, HSBC believes recent CHF weakness was primarily caused by its lack of carry as ECB hawkishness outpaced the SNB. It nonetheless sees limited reasons for EUR-CHF to rise further: the pair screens rich under its REER-based valuation work and short-term moving averages, while the Swiss trade balance shows early recovery. August Swiss CPI rose to 0.8% year-on-year, close to the midpoint of the SNB target range, making policy risks more balanced. Switzerland's energy trade balance is about 0.5% of GDP versus close to 2% for the euro area, so higher energy prices should impose a smaller terms-of-trade drag on the CHF; safe-haven demand could also re-emerge in a larger risk-off event. HSBC maintains its year-end EUR-CHF forecast of 0.91. Across regional trade themes, HSBC favors AUD over CAD because upside growth and inflation surprises have raised expectations for the RBA cash-rate path while CAD appears rich relative to rate expectations. It favors JPY over KRW after JPY-KRW rebounded from 8.55, although it warns that an already strong KRW and stretched positioning could limit near-term gains. It favors lower USD-TWD as de-dollarisation, tighter monetary expectations and potential hedging flows may support the TWD; it favors INR over IDR because Indonesia faces business-climate uncertainty and net FX reserves are down 15% year-to-date while India has greater FX-reserve support. HSBC remains constructive on TRY total return due to high carry and stronger reserves despite unchanged 37% policy rates. It expects HUF weakness as easing continues, is cautious on BRL amid election volatility, and expects PEN strength if BCRP USD purchases remain absent, supported by strong terms of trade, capital inflows and external accounts.

Analysis framework

HSBC evaluates currencies through cyclical conditions, structural vulnerabilities and political or policy credibility. It combines relative data surprises, rate differentials, central-bank pricing, capital-flow evidence, trade and current-account dynamics, fiscal and political developments, positioning, and valuation measures including REER- and PPP-based ranges.

Methodology notes

• Macroeconomics

  Cyclical, structural and political/policy USD framework

  HSBC assesses the USD by separating relative growth and rate conditions from fiscal and external-demand concerns and from policy or political uncertainty.

• Valuation methods

  HSBC Little Mac Valuation Ranges using REER and PPP estimates

  The method builds pair-specific REER measures and compares current estimates with averages over every available window of at least five years, producing a range of implied PPP values rather than relying on one arbitrarily selected moving-average window.

• OtherYield curve analysis

  Decomposition of Treasury-yield moves into risk-neutral rates and term premium

  The report uses the different USD relationships with risk-neutral yields and term premia to explain why fiscal developments can have opposing cyclical and structural currency effects.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• EUR-USD

  HSBC expects gradual weakening into 2027

  Strengths

  Eurozone growth has stabilised and lower implied volatility can support the pair.

  Weaknesses

  Energy exposure, a trade deficit, high priced-in ECB tightening and political risk create downside pressure.

  Comparison

  Recent EUR-USD gains are attributed more to USD weakness than euro-specific improvement.

  Risks

  A durable USD downturn, stronger Eurozone investment and productivity, or contained French fiscal risk could change the view.

• USD-JPY

  HSBC lowered near-term forecasts as JPY recovery prospects improved.

  Strengths

  Potential BoJ hawkishness and GPIF domestic allocation could support a durable JPY recovery.

  Weaknesses

  There is little evidence so far that domestic yields have changed Japanese investors' behavior materially.

  Comparison

  A policy-driven move would be more durable than intervention alone.

  Risks

  BoJ rhetoric or domestic-policy changes could disappoint.

• EUR-CHF

  HSBC favors a lower EUR-CHF into Q4 2026.

  Strengths

  Swiss trade-balance recovery, firmer inflation and relatively lower energy exposure support CHF.

  Weaknesses

  CHF has lacked carry support as ECB policy has appeared more hawkish than SNB policy.

  Comparison

  EUR-CHF appears rich on HSBC's REER-based valuation approach and short-term averages.

  Risks

  Further upside in the pair remains possible after recent moves.

• AUD-CAD

  HSBC favors higher AUD-CAD.

  Strengths

  AUD is supported by recalibrated RBA expectations following upside growth and inflation surprises.

  Comparison

  HSBC prefers expressing CAD caution against AUD rather than USD because CAD looks rich relative to interest-rate expectations.

• USD-PEN

  HSBC favors lower USD-PEN.

  Strengths

  PEN is supported by strong terms of trade, external accounts, FDI and portfolio inflows.

  Weaknesses

  BCRP intervention has been a principal impediment to further appreciation.

  Comparison

  HSBC views PEN as fundamentally undervalued.

  Risks

  Renewed BCRP USD buying could limit PEN gains.

Key data

• USD-JPY 3Q26 forecast158Lowered from 161
• USD-JPY 4Q26 forecast160Lowered from 162
• USD-JPY mid-2027 forecast164Unchanged
• BoJ market pricing100% probability of a 25bp hike on 18 September; 75bp by April 2027A much faster implied hiking pace than the BoJ's recent history
• GPIF domestic-bond allocation25.59%At end-June 2026, versus a 25% target and +/-6ppt permissible range
• Potential GPIF shift per percentage pointJPY3.2trn (USD20bn)Based on approximately JPY320trn of GPIF assets
• Swiss headline inflation0.8% year-on-yearAugust print, near the midpoint of the SNB target range
• EUR-CHF year-end forecast0.91Maintained by HSBC
• US budget deficit forecast6.2% of GDPHSBC economists' forecast for 2026
• Eurozone gas sensitivity thresholdEUR70-80/MWhRange above which HSBC says EUR-USD historically faces more significant pressure

Impact & implications

The report portrays FX performance as increasingly dependent on policy credibility rather than rate levels alone. Its baseline expects gradual USD recovery, but this is conditional on US cyclical, fiscal and policy pressures stabilising. It sees the euro facing medium-term structural headwinds, the yen gaining durability only if domestic policy and portfolio shifts materialise, and the franc positioned to recover against the euro if valuation and Swiss fundamentals reassert themselves.

Risks

• Further deterioration in US cyclical, structural or political-policy credibility could drive the USD materially lower than HSBC's baseline.
• If US data remain soft and the Fed stays cautious, EUR-USD could stay supported longer than HSBC expects.
• A more convincing Eurozone productivity and investment upswing or preserved French fiscal credibility could challenge the EUR-USD downside view.
• BoJ policy rhetoric or a domestic portfolio shift could disappoint, limiting a sustained JPY recovery.
• Higher oil prices, global risk-off conditions and policy divergence remain risks to individual currency forecasts.

What to watch

• FOMC meetings on 16 September and 28 October and US midterm elections on 3 November.
• The BoJ policy decision on 18 September, including evidence of a more hawkish reaction function.
• Whether GPIF or other Japanese investors shift allocations toward domestic assets.
• US inflation, labor-market data, Treasury term premia and signs of fiscal-policy credibility stress.
• Eurozone gas prices, storage levels, trade balances and France's election-fiscal risk premium.
• Whether BCRP resumes USD purchases and whether de-dollarisation-related FX flows gain traction.