Key Highlights

• Current U.S. dollar downtrend at turning point, with focus on EUR, JPY
• Summer melt-up in equities faces reciprocal tariffs and Q2 earnings
• APAC convergence is an opportunity for underheld and undervalued AUD and NZD

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What you need to know

Macro risks have narrowed, but two hurdles remain. Despite the summer melt-up narrative being bolstered by dovish signals from Sintra and Chair Powell’s openness to a July cut given resilient ISM and nonfarm payroll prints, reciprocal tariffs and the beginning of the Q2 earnings season loom. With monetary policy decisions due from the RBA, RBNZ and BoK alongside Chinese CPI and trade data plus fresh European inflation numbers, another pause may prove less potent than the certainty of actual rate moves – but will policymakers blink? There is ongoing currency volatility. The USD rose from a 3½-year low after EUR/USD traded above 1.18, while U.K. fiscal dominance fears – sparked by expanded social spending plans – hit GBP and gilts until Prime Minister Starmer affirmed Chancellor Reeves’s mandate. In Washington, the “Big Beautiful Bill” raised the debt ceiling, averting an August shutdown and giving the president runway to double down on a peace deal between Russia and Ukraine and to pursue trade deals with the EU, Canada and Japan. Through it all, U.S. asset performance and USD hedging remain at the core of summer positioning.

Flows and structural themes

• June ETF data show commodities and alternatives drawing the strongest inflows, equities only edging past bonds, and both retail and institutional investors still holding capacity to add risk.
• Stablecoins stay in focus as Circle’s valuation jumped 6x post-IPO, feeding speculation that wider USD-backed token adoption will lift demand for short-dated U.S. Treasury bills.
• Debate over the USD downtrend and reserve currency status persists, linked to pressure on the Fed and lingering doubts about swap-line availability, as investors seek diversification.

USD weakness continues despite decreased concerns about U.S. growth and inflation

_{EXHIBIT #1: IFLOW USD HOLDINGS AGAINST USD FORECASTS AND PERFORMANCE}

_{Source: BNY, Bloomberg}

Our take: USD positions are back to October 2024 lows with the EUR the main beneficiary. Alternatives to the USD are also winners, with Bitcoin back to $110,000 and gold at $3,325/oz. However, U.S. stock market returns are up 5% on the year and U.S. bonds are stable with 10-year yields at around 4.33% while Fed policy is still expected to deliver two cuts in 2025 due to lower inflation rather than higher unemployment. This narrative clashes with the movement of the USD, which continues to decline despite U.S. growth and asset performance. Doubts about the dollar reflect ongoing worries about U.S. trade policy and volatility elsewhere forcing hedging. The momentum of USD weakness has shown a life of its own, all of which could turn or accelerate in the week ahead.

Forward look: The global melt-up in equity markets makes buying U.S. assets a matter of relative performance, suggesting that Q2 earnings – which start in earnest on July 15 with the big banks – may drive further USD gains or require significant USD hedging. The role of U.S. interest rate policy matters, too, as lower U.S. rates reduce the cost of hedging out the FX risks of owning U.S. assets. Pressure on Chair Powell to cut rates or resign or face early replacement adds to the uncertainty around the USD. So, too does the pressure from trade policy as many see U.S. stagflation risks returning if tariffs are over 10–15%. The hypothesis that tariffs have minimal impact on inflation and growth will be tested next week.

What We’re Watching

After strong U.S. jobs report, we’re back to watching inflation

_{EXHIBIT #2: U.S. SURVEY-BASED INFLATION EXPECTATIONS}

_{Source: BNY, New York Federal Reserve, University of Michigan}

Our take: It’s a quiet week for U.S. data. Beyond the regular jobless claims data on Thursday, there isn’t too much to sink one’s teeth into. However, the June FOMC minutes will be published on Wednesday. We don’t expect too much from this report, given the host of Fedspeakers who have made appearances since that meeting. With a very solid NFP report last week, the July rate cut debate is closed for now, while the next meeting after that, in September, could still be “live” – the summer is far from over.

Forward look: It may seem highly technical, but the New York Fed’s Survey of Consumer Expectations is, to us, an important read on how households feel about inflation. One reason the Fed continues to preach – and follow – a wait and see policy approach is due to potential increases in inflation from tariffs, and short-term inflation expectations on the part of consumers have become, one could argue, de-anchored. The Fed will not want to see these expectations deteriorate further.

Finally, Canada releases its household survey of employment on Friday. The establishment survey at the end of June showed continued labor deterioration, and we think another weak print could finally force the Bank of Canada to ease further in H2 2025.

Nordic canaries in the coalmine for European pass-through disinflation

_{EXHIBIT #3: SCORED HOLDINGS FOR NOK AND SEK}

_Source: BNY

Our take: As crunch time for global tariffs arrives, we continue to see the EU as one of the laggards in reaching a trade deal. U.S. Treasury Secretary Bessent has tried to manage expectations from the outset, warning that Europe’s “collective action” needs could delay proceedings. Recent warnings by President Trump that Spain’s unilateral stance on defense commitments to NATO could result in additional tariffs would also undermine proceedings. As much as Spain’s views on defense deviate from the general European Union consensus, adversarial carve-outs will not be acceptable to the Commission. Yet, judging by current price action the EUR does not seem overly affected by the lack of progress. We see some justification for such a stance. Firstly, the bilateral trade relationship remains far too large for total fracture, so some form of agreement – albeit delayed – should remain the base case. Secondly, the ECB has been at pains to highlight that the Eurozone economy is not overexposed to U.S. demand so any adjustment beyond what has been reflected since April is manageable. The shift in domestic demand (through higher public-sector investment) remains the core driver of improved asset allocation in Europe, but this also means that disappointments on this front will also have an outsized effect. Exporters still face headwinds, whereas falling inflation will also limit top-line growth for companies with higher domestic exposure.

Forward look: Comments by various policymakers at the ECB’s Sintra forum point to general satisfaction with current Eurozone price dynamics, but tolerance levels over EUR strength vary greatly. There is also a difference between the pace of appreciation and levels – and most central banks will focus on the former in policy-setting. We agree that this is where the biggest stress lies as inflation and price adjustments react swiftly, which policymakers need to pre-empt. While the size of the Eurozone means price transmission via pass-through is slower, the current indications are not positive given the downside inflation surprises seen across the bloc in June. The week ahead sees Norway and Sweden’s CPI releases. As pass-through is faster in smaller, open economies, the risk to inflation remains to the downside in the Nordics, especially considering the dollar has fallen by 12%–14% against both currencies year-to-date. Sweden’s inflation numbers are barely positive, while Norges Bank’s surprise cut in June also had a pass-through component. The policy board noted that “underlying inflation has declined and been somewhat lower than projected,” in part because “international price impulses to imported consumer and intermediate goods appear to be weaker than previously assumed.” Our holdings show that despite heavy savings levels, there is little confidence in adjusting cross-border hedges on Swedish assets. Furthermore, NOK may have benefited from initial assumptions over Norges’ inability to cut rates, but inflation disappointment will challenge very stretched positioning, notwithstanding the central bank’s decision to recommence FX sales.

APAC convergence is a necessity for antipodean assets

_{EXHIBIT #4: SCORED HOLDINGS FOR AUSTRALIAN AND NEW ZEALAND EQUITIES}

_Source: BNY

Our take: As trade and fiscal issues in the U.S. return to the fore, discussions surrounding the status of the dollar and U.S. Treasurys will likely return. We don’t see a repeat of the volatility in April and May, and our data show that “U.S. de-risking” is a factor more talked than acted upon. Even so, given the current adjustments in global balance of payments and real rates, there should be demand for assets with higher commodity exposures, which in turn offer “real term protection” in purchasing power. For example, we identified several commodity-linked currencies in FX markets which performed well in June, and which in turn also led to rebalancing pressure in the opposite direction, including NOK, BRL and ZAR. More recently, even smaller names such as COP and PEN are seeing demand, but this has not translated into interest in antipodean exposures. AUD and NZD have seen lackluster holding changes in the past year and spot levels remain well below September 2024’s highs for both. Despite being a very liquid “super-AAA” rated currency, the last time AUD was overheld was January 2023. Currently, Australian equities are only just above their average holding levels over the last 12 months, while New Zealand equity holdings remain below this level (Exhibit #4). There was a small bounce in Australian government bond holdings in the aftermath of “Liberation Day” but they are still 15% or so below last year’s peak.

Forward look: The AUD’s strong performance during the commodity supply stress in 2022 shows that the currency can benefit from a purchasing power theme, and the RBA itself has also retained higher nominal and real rates relative to peers. However, the region remains too closely linked to weakening APAC growth, with justification, so a turnaround could prove difficult unless asset allocators re-rate the region’s growth. Repeated hopes for stimulus by China to reflate the domestic and even regional economy have not come to fruition, but structural changes are afoot in response to global trade tensions, which will be beneficial for growth over the longer term. Currently, our data show that EM APAC equity holdings are outperforming the region, and initiatives by Beijing to stop deflationary competition could be material in helping equities re-price. It is too early for the RBA and RBNZ to change their respective outlooks for now and precautionary easing is still expected in the week ahead, but the current path for APAC looks set to improve for asset allocation, and there is space for Australian and New Zealand assets to benefit from growth and flow convergence. Furthermore, antipodean valuations are far more favorable compared to other markets in G10. Barring strongly dovish guidance, we see an opening for renewed interest in asset flows, likely led by equities and fixed income. The FX shift will take longer while cross-border hedge ratios remain high.

Bottom line

More bricks are being added to the “wall of worry” in July. With geopolitical events remaining volatile, we probably won’t see the usual summer investing doldrums. Even events we know are coming, like a reprise of April’s reciprocal tariffs, could present a new test this week. The potential market reaction to these events explains the barbell-shaped holdings we’re seeing, with cash and carry both popular at the moment. There has also been fallout from the diversification away from U.S. assets, with the unwinding of “TINA” (there is no alternative to U.S. assets) a key element of the 2025 narrative. Growth and inflation data next week will be an important sign of how the rest of the world is viewed and the opportunities ahead. Will we have a quiet summer or a summer of discontent? It depends on the data and events in the coming weeks and months.

Calendar for July 7-11

Central bank decisions

Israel, BoI (Monday, July 7) – The Bank of Israel is expected to leave its benchmark rate unchanged at 4.50% for a tenth consecutive meeting, as inflation remains just above the 1%–3% target at 3.1% y/y in May, though the headline print was much lower than expected. The shekel has appreciated slightly, and recent data show improving inflation expectations. However, the monetary committee continues to monitor geopolitical risks, including regional instability and their effect on investment and inflation. While markets began pricing in a potential cut in August, policymakers have given no signal of near-term easing. The decision is expected to reflect caution, with the central bank reiterating the need to maintain stability.

Australia, RBA (Tuesday, July 8) – The RBA is expected to cut the cash rate by 25bp to 3.60%, following a similar move in May as part of a cautious easing cycle. The market now expects further easing amid persistently weak retail spending and fragile consumer sentiment. Despite the obvious impact on domestic demand and income growth, Governor Michele Bullock recently highlighted that housing affordability issues are more structural than monetary and reiterated the Board’s data-dependence. With inflation easing and unemployment edging higher, markets expect the RBA to maintain a measured approach. Forward guidance is likely to remain cautious, balancing disinflation progress with uncertainty around global demand and domestic price pressures.

New Zealand, RBNZ (Wednesday, July 9) – The RBNZ is expected to cut the cash rate by 25bp to 3.00%, continuing its easing cycle that began in August 2024. Since then, the central bank has reduced the OCR by 225bp from a peak of 5.50%. The May 2025 rate cut to 3.25% was the sixth consecutive reduction, reflecting concerns over subdued economic growth and global uncertainties, including trade tensions. Inflation remains within the 1–3% target range, providing the RBNZ with room to maneuver. However, the central bank has signaled a cautious approach moving forward, emphasizing data-dependence and the need to monitor both domestic and international developments. Markets anticipate at least one more rate cut this year, with the OCR potentially falling below 3% in early 2026.

Malaysia, BNM (Wednesday, July 9) – Bank Negara Malaysia is expected to cut its Overnight Policy Rate by 25bp to 2.75%, marking its first adjustment in over a year. Headline inflation slowed to 1.2% y/y in May – the lowest level since late 2020 – while core inflation also eased to 1.8%, both well within the 1–3% target range. The central bank has not signaled concern over inflation risks and has indicated that policy remains data-driven. With domestic demand softening and external conditions remaining weak, markets are positioned for an initial cut in July. BNM is likely to emphasize its commitment to price stability while supporting growth in a challenging global environment.

South Korea, BoK (Thursday, July 10) – The Bank of Korea (BoK) is expected to maintain its base rate at 2.50% during the upcoming meeting, following a 25bp cut in May. This decision marked the fourth rate cut since October 2024, bringing the base rate to its lowest level since September 2022. The May cut was a response to a 0.2% contraction in Q1 GDP and easing inflation pressures. However, June's inflation data showed a rise to 2.2% y/y, up from 1.9% in May, surpassing market expectations and marking the highest reading since January. This uptick in inflation, coupled with concerns over currency volatility and global economic uncertainties, suggests that the BoK may adopt a cautious stance. Governor Rhee has emphasized the need to balance supporting economic growth with maintaining price stability. While markets anticipate further easing later in the year, the central bank is likely to pause in July to assess the evolving economic landscape. Trade talks will also factor into the decision given South Korea’s strong export exposure to the U.S.

Peru, BCRP (Thursday, July 10) – Peru’s central bank is expected to maintain its benchmark interest rate at 4.50% during its upcoming meeting, following a 25bp cut in May and a hold in June. Annual headline and core inflation remained steady at 1.7% in June, both comfortably within the BCRP’s 1%–3% target range. The bank has signaled a data-dependent approach, emphasizing that future rate adjustments will hinge on evolving inflation dynamics and economic indicators. Despite a slight weakening in economic activity indicators in Q2, the overall outlook remains optimistic, with output hovering around its potential level. Markets anticipate a continued pause in July, with the central bank likely to reiterate its commitment to price stability amid global economic uncertainties.

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