Middle East risk determines FX 'upslope/downslope'; USD remains relatively firm in the short term, but the soft-USD main theme is not abandoned

Overview

The report uses 'Ramp on - Ramp off' as its main thread to discuss how Middle East conflict, oil prices, shipping disruptions, USD safe-haven buying, and global risk appetite affect major currencies and gold. HSBC believes the FX market remains driven by alternating phases of rising and easing geopolitical risk: when tensions escalate, USD and oil rise together and risk appetite falls; if a credible cooling path emerges, the conditions for USD weakness, a rebound in risk-sensitive currencies, and a renewed gold rally improve.

Core views

The core views are: first, USD is still supported in the short term by Middle East risk, energy supply shocks, and tighter US financial conditions, and may remain relatively firm especially from Q2 to Q3; second, HSBC is still unwilling to fully turn to a strong-USD forecast because the Fed is not in a hiking cycle and the broad USD still faces medium-term constraints; third, GBP is weighed down by the UK's energy trade deficit, inflation sensitivity, and twin-deficit structure, and Brent near USD150/bl could significantly test GBP; fourth, CHF's upside is limited by SNB intervention risk, but trade surpluses and inflation risk keep it resilient; fifth, the short-term pullback in gold does not alter medium-term support, as fiscal expansion, central bank demand, and macro uncertainty still favor prices.

Analysis framework

The report adopts a parallel regional and asset-based analytical approach: it first uses geopolitical risk, oil prices, shipping through the Strait of Hormuz, and USD correlation to assess the global risk backdrop, then separately analyzes the relative winners and losers across G10, Asia, CEEMEA, and LatAm; at the same time, it combines central bank policy, yield differentials, trade balances, energy import dependence, capital flows, fiscal risk, and positioning changes to screen trading themes.

Methodology notes

• Macro scenario frameworkRamp on - Ramp off

  Switching between heightened and eased geopolitical risk

  The FX market is framed as switching between Middle East escalation and de-escalation: escalation favors USD and safe-haven assets, while easing is more favorable for risk-sensitive currencies and non-USD recovery.

• FX conditions frameworkHierarchy of Needs

  Basic conditions for domestic currency strength

  The report emphasizes that oil prices, USD, and US financial conditions are foundational variables that must improve before a domestic currency can strengthen sustainably; if oil stays high, USD remains firm, and financial conditions tighten, other currencies find it harder to appreciate sustainably.

• Currency modelG10 FX model update

  Rules based on valuation, carry, and policy paths

  The G10 model shows USD is slightly expensive versus six major risk-sensitive currencies; in a ceasefire or mild-de-escalation scenario, AUD, NZD, and CAD have more room to recover, while EUR is relatively expensive versus USD.

• GBP analysis frameworkThree-stage framework of cycle, structure, and policy uncertainty

  Separating GBP's short-term support and medium-term vulnerability

  The report analyzes GBP through cyclical factors, the UK's twin-deficit structure, and policy credibility: short-term rate support helps GBP, but energy shocks and structural external deficits may weigh on GBP in an escalation scenario.

Asset mapping & comparison

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

• USD

  Benefiting from Middle East geopolitical risk, rising oil prices, and safe-haven demand

  Strengths

  Strong safe-haven characteristics; when conflicts escalate it strengthens alongside oil. If global growth momentum slows and the Fed remains hawkish, USD can still benefit.

  Weaknesses

  The Fed is not in a hiking cycle, and the report believes the probability of a 2022-style 'USD bubble' is low.

  Comparison

  It is relatively firmer than most European and Asian currencies in the short term, but could re-enter a weakening trend in a credible de-escalation scenario.

  Risks

  If shipping through the Strait of Hormuz recovers, oil prices fall back, and the positive correlation between USD and oil weakens, USD support could fade.

• GBP

  Affected by Middle East oil prices, UK inflation, and a structural twin-deficit backdrop

  Strengths

  The BoE showed a hawkish bias at its March 19 meeting, and rate expectations provide short-term support for GBP.

  Weaknesses

  The UK's energy trade deficit and goods trade deficit are large, and inflation is more sensitive to exchange rates and energy prices.

  Comparison

  GBP-USD direction is dominated by geopolitical risk, but GBP may come under pressure relative to energy-sensitive currencies such as CAD.

  Risks

  If Brent approaches USD150/bl, it could significantly test policy credibility and GBP stability.

• CHF

  Combines safe-haven resilience with constraints from SNB intervention risk

  Strengths

  Switzerland's strong twin surpluses support CHF resilience, and upside inflation risks reduce the probability of sustained large-scale intervention.

  Weaknesses

  The SNB's willingness to intervene against excessive appreciation limits CHF's upside.

  Comparison

  Because policy rates are low and volatility is limited, the report views CHF as a funding currency and prefers Higher AUD-CHF.

  Risks

  If equities sell off sharply again, safe-haven demand could lift CHF, but intervention risk would cap gains.

• Gold

  Driven by USD, yields, oil, central bank demand, and fiscal risk

  Strengths

  Fiscal expansion, central bank buying, and uncertainty support gold's medium-term rise, and HSBC has raised its forecast.

  Weaknesses

  Post-conflict profit-taking, USD strength, rising yields, and oil-related disruptions have caused gold to pull back.

  Comparison

  Oil itself is not a good predictor of gold; USD and the monetary policy environment matter more.

  Risks

  If USD continues to strengthen and real yields rise, gold's rally could be delayed.

• AUD-CHF

  The report prefers Higher AUD-CHF

  Strengths

  AUD stands out within G10, the RBA had a hawkish stance before the conflict, and Australia's inflation starting point already makes the RBA uncomfortable.

  Weaknesses

  AUD is still a risk-sensitive currency and will be hit in the short term by risk-off sentiment.

  Comparison

  Compared with low-rate CHF, which is constrained by intervention risk, AUD has better policy and recovery elasticity.

  Risks

  If Middle East risks escalate again and drag down global risk appetite, AUD may remain under pressure.

• GBP-CAD

  The report prefers Lower GBP-CAD

  Strengths

  CAD is supported by oil sensitivity and Canada's economic resilience.

  Weaknesses

  GBP's rate buffer may be weakened in a de-escalation scenario, while an escalation scenario would again expose its structural weaknesses.

  Comparison

  Canada's economy is relatively better insulated from the Middle East conflict, so CAD may outperform GBP in a renewed escalation scenario.

  Risks

  If oil prices fall sharply and UK policy credibility improves, the downside for GBP-CAD may narrow.

• CHF-CNH

  The report prefers Lower CHF-CNH

  Strengths

  RMB resilience comes from renminbi internationalization, long-term USD diversification, economic rebalancing, and a more stable USD-CNY fixing.

  Weaknesses

  CNH will still be affected by external volatility and global risk-off sentiment.

  Comparison

  Compared with shorting USD directly, expressing a positive RMB view via CHF is a cleaner way to capture RMB strength.

  Risks

  If global safe-haven demand surges, CHF may strengthen temporarily and weigh on this trade.

• THB-KRW

  The report prefers Lower THB-KRW

  Strengths

  KRW is supported by tax incentives for Korean asset repatriation and WGBI-related bond inflows.

  Weaknesses

  Both THB and KRW are affected by energy imports and dividend-season outflows, but THB is additionally weighed down by the tourism off-season and slower FDI realization.

  Comparison

  The report believes that if the ceasefire holds, KRW will recover faster and further than THB.

  Risks

  If Korea's portfolio inflows fall short of expectations or energy prices continue to rise sharply, KRW recovery may be hindered.

• USD-IDR

  The report prefers Higher USD-IDR

  Strengths

  Although IDR is relatively less sensitive to oil and gas shocks due to coal and palm oil exports, it still faces multiple pressures.

  Weaknesses

  Fiscal risks, insufficient portfolio inflows, MSCI review, rating outlook pressure, residents' preference for accumulating foreign-currency deposits, and 2Q dividend outflows are all negative for IDR.

  Comparison

  Among Asian currencies, IDR is more vulnerable than RMB, SGD, MYR, and KRW.

  Risks

  If capital inflows improve or energy shocks ease, the upside for USD-IDR may narrow.

• EUR-PLN

  The report prefers Lower EUR-PLN

  Strengths

  PLN is supported by Poland's solid growth, low inflation, a slightly restrictive monetary environment, ample FX reserves, and EU fund inflows.

  Weaknesses

  Regional political noise and energy shocks remain a source of disturbance.

  Comparison

  Relative to HUF, PLN has stronger fundamental and policy support.

  Risks

  If geopolitical risks worsen or EU fund inflows are blocked, PLN appreciation may slow.

• USD-PEN

  The report prefers Lower USD-PEN

  Strengths

  Peru's resilient growth, potential positive fund flows from the April 12 election, a strong external account, and a healthy FDI pipeline support PEN.

  Weaknesses

  PEN is still influenced by global risk appetite and copper prices.

  Comparison

  In LatAm, PEN is seen as a currency with both election and external-account support.

  Risks

  If the election result is unfavorable or copper prices fall back, the PEN appreciation case may weaken.

• USD-CLP

  The report prefers Lower USD-CLP

  Strengths

  Chile's macro and policy backdrop is positive, and new President Kast's reform agenda may boost growth; if the conflict ends, CLP has strong rebound elasticity.

  Weaknesses

  Chile is the region's largest net oil and gas importer, and CLP has underperformed significantly due to oil prices and crowded positioning.

  Comparison

  If Middle East tensions ease, CLP could be one of the biggest beneficiaries in LatAm.

  Risks

  If oil prices stay elevated or crowded long USD-CLP positioning is not unwound, CLP recovery may be delayed.

Key data

• Oil price versus pre-conflict levelabout 35% higherThe report says oil prices are still about 35% above pre-conflict levels, leaving Asian energy importers under pressure on trade, inflation, fiscal accounts, and growth.
• UK goods trade deficit8.5% of GDPThe report says the UK's goods trade deficit is the largest in the G10, with energy and food deficits at 1.1% and 1.4% of GDP, respectively.
• Brent stress scenarioUSD150/blIf Brent approaches USD150/bl, it could test the UK's structural vulnerability and significantly weigh on GBP.
• Decline in some Asian FX reservesINR, IDR, PHP about 3%; THB about 5%The report says some Asian central banks may have intervened heavily in March and may later need to rebuild reserves and reduce short forward positions.
• Expected Korea WGBI-related bond inflowsUSD53-63bnHSBC Rates Strategy expects Korea could see USD53-63bn of bond inflows from end-March to end-October 2026; the Korean government said as of April 9 there had already been USD4.6bn of related inflows.
• RBA policy move+25bpThe report notes that the Fed, ECB, BoJ, BoE, Riksbank, and SNB kept rates unchanged, while the RBA raised the cash rate by 25bp.
• Closed EUR-BRL trade profit2.5%The report says the recent sell EUR-BRL trade was closed with a 2.5% profit.
• USD-CLP long positioning changeUSD3.7bn to USD11bnThe report says long USD-CLP positioning rose sharply in March; if the Middle East conflict stops, CLP could significantly outperform.

Impact & implications

For investors, this report is not about simply chasing a strong USD, but about emphasizing 'selective expression' under uncertainty: if the conflict escalates or supply disruptions persist, USD, CAD, and some energy-linked or defensive currencies are better supported; if the conflict eases, AUD, NZD, CAD, KRW, PEN, and CLP have greater recovery room. For gold, the short-term pullback is viewed as a possible correction rather than an end to the trend, with central bank demand, fiscal risk, and macro uncertainty still providing medium-term support.

Risks

• The Middle East conflict escalates again, pushing oil prices, USD, and safe-haven demand higher together.
• Shipping through the Strait of Hormuz recovers more slowly than expected, extending energy supply disruptions for months.
• Persistently high oil prices trigger second-round effects, including food prices, inflation expectations, and uncertainty in central bank responses.
• Asian and European energy importers face greater pressure on trade, fiscal accounts, inflation, and growth.
• If the Fed unexpectedly turns more hawkish or US financial conditions tighten further, USD may be stronger than the report's base case.
• If central bank intervention, capital controls, or policy credibility shifts more than expected, some currency trades may diverge from fundamentals.

What to watch

• Whether the number of ships actually passing through the Strait of Hormuz clearly recovers.
• Whether the positive correlation between USD and oil begins to weaken.
• Whether Brent approaches the USD150/bl stress scenario.
• How the Fed, BoE, SNB, RBA, and other central banks respond to energy shocks and inflation expectations.
• Asian FX reserves, forward positions, and 2Q dividend outflow pressure.
• Korea's WGBI-related bond inflows and the effectiveness of asset repatriation policies.
• LatAm peace-talk progress, copper prices, and changes in crowded USD-CLP positioning.
• Gold central bank demand, real yields, and USD trends.