Key Highlights

• EURUSD unwinding outpaces G10 peers
• Brazil and Peru sending different equity signals in Latin America
• JGB interest is now leading CGBs despite balance-of-payments stress

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EUR now moves to net underheld, led by EURUSD unwinding

EXHIBIT #1: SCORED WEEKLY FLOWS, EURUSD VS. GBPUSD

_{Source: BNY, Bloomberg}

Our take

The dollar has clearly established its status as the premier safe-haven currency during geopolitical stress and supply shocks. Despite far more aggressive pricing of rate hikes among the likes of the European Central Bank (ECB) and the Bank of England (BoE) compared to the Fed, the dollar has been solidly bought on a weekly smoothed basis throughout the last month. This represents the unwinding of the “hedge the dollar” theme seen through much of January and February, whereby the market was not reducing underlying exposure to U.S. assets, but comfortably adding to USD hedges, with the Fed expected to be materially more dovish than peers.

What is surprising during the recent unwinding process, however, is that the burden of adjustment has disproportionately fallen on EURUSD. All of Europe is at risk of stagflation – a situation ECB and BoE policymakers have acknowledged – and the OECD has also stated that the U.K. may suffer the most. However, from the outset, EURUSD has faced much larger hedging flows, while GBPUSD’s weekly scored flows have recently stabilized in positive territory.

Forward look

Several factors are crucial in driving EURUSD and GBPUSD flows, especially when a trend is emerging. Normally, the first is rate differentials, but this clearly hasn’t been a major factor as markets acknowledged that aggressive rate increases would undoubtedly hurt growth – indeed that is the point during inflation targeting amid supply shocks – and would not support local assets at all. Secondly, as U.S. assets’ net asset values decline, forward purchases of EUR and GBP (i.e. extant hedges) are gradually removed. GBPUSD stability also points to limited adjustments by European asset managers. Rather than taking a view on the dollar, it is possible that the market is now shifting toward a more cautious view on the EUR and its valuation: on an aggregate basis, the currency has now moved back into underheld for the first time since late 2024 and early 2025, during which the Eurozone was facing a confluence of adverse factors, from growth to politics. This “discretionary” factor is likely weighing on sentiment again, suggesting that the market is now concerned that the Eurozone and its assets could face a far larger negative impact relative to baseline. In contrast, the U.K. was not even expected to outperform under “normal” conditions, so pressure to increase incremental hedging was far lighter.

Equities: Latin America leads holdings, but not all countries have the same driver

EXHIBIT #2: SMOOTHED MONTHLY EQUITY FLOWS, BRAZIL AND PERU

_{Source: BNY, Bloomberg}

Our take

Latin America remains the most resilient region across all asset classes. On a holdings basis, all currencies in the region remain comfortably overheld. LatAm was also the best-performing equity region, and our data show that it was the only regional aggregate that saw material net inflows from a strongly overheld level. This is a rarity during a period of broader market risk-off, underscoring the region’s distance from current events and strong potential to benefit from repricing in global commodities.

However, within LatAm we note that there are major differences between individual markets. For much of the conflict, Brazil was seen as the best “hedge,” realizing stronger terms of trade from food and energy exports. Furthermore, it retains one of the highest nominal rate levels in emerging markets, which provides a buffer against sales. In contrast, Peru is now almost a “single-commodity” currency and equity market, with fortunes closely tied to silver prices. Therefore, it’s no surprise that the two show diverging flow trends: while both have been comfortably bought for the year, their flow trends year to date are almost completely opposite.

Forward look

Based on the broader risk environment, it seems that when markets are keen to pursue concentrated themes in a “risk-on” manner, Peruvian equities offer strong exposure, even given the high dependency on very volatile but “real” assets. Brazil offers much greater diversification in terms of commodity exposure and rates, giving the currency a regional “safe haven” feel. Based on current flow trends, the fact that Peruvian equities are now outperforming Brazil for the first time since the conflict began points to much stronger risk preference compared to broader markets. However, this only seems possible in a region most insulated from current events.

Fixed income: Higher JGB yields starting to compensate for currency risks

EXHIBIT #3: MONTHLY SMOOTHED FLOWS, JAPANESE VS. CHINESE GOVERNMENT BONDS

_Source: BNY 

Our take

During the first few weeks of the conflict, we note that China was one of the key beneficiaries as a safety play outside the dollar and U.S. assets. CNY was the best-performing currency in iFlow during the first two weeks of the conflict, when low realized volatility was seen as a clear positive. In contrast, JPY has been underperforming, with clear risks to the balance-of-payments outlook compounded by the lack of monetary assertiveness. However, fears of intervention and extreme valuation gaps have also supported JPY flows.

To reinforce “haven status,” CNY and JPY purchases should complement additional flows into underlying assets, especially the liquid government bond markets. This was clear for the dollar, which saw a material flow recovery while interest in U.S. Treasurys was also strong throughout March. In contrast, flows into both JGBs and CGBs have been struggling since mid-January, though JGB flow has finally turned around and is now approaching its best year-to-date performance. In contrast, CGBs continue to struggle for interest, undermining the safe-haven narrative for CNY and Chinese assets. Furthermore, upon matching CNY flow trends, underlying CNY behavior is likely linked more to hedging adjustments rather than outright safety interest.

Forward look

In the near term, we believe yields and the policy outlook remain the biggest challenges. One of China’s advantages in the current supply shock context is that the country’s starting point for inflation is low, so the damage to real rates should not be as significant. However, it does matter for asset allocation if nominal yields are also depressed and without a clear growth or inflation narrative as an offset. In contrast, Japan’s yield curve outlook has faced embedded inflation risk for several years, to the point where nominal yields are sufficient to offer some compensation, even though the frontend and FX component remains difficult to realize. On a marginal basis, an energy shock is not considered as extreme, given markets already have experience from 2022 to 2023, and FX intervention risk remains real. The divergence in cross-border CGB and JGB flows shows that holistic valuations matter for cross-border flows. Factoring in liquidity (another area where JGBs have an advantage), FX valuations, bond yields and the growth/rate outlook, JGBs will likely maintain precedence.

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