【Foreign Exchange Trends】Most Valuable Foreign Currencies in the First Half of the Year Chinese Experts Support the Twin Treasure Currencies

The US and Iran are talking while fighting, but the road to end the war remains long. Iran just rejected the US ceasefire plan, no wonder “alert money” has already “abandoned” the war, as stocks, currencies, and bonds are redeployed from defense to offense, stimulating the US stock indices, NASDAQ, and even Japanese, Korean, and Taiwanese stocks to repeatedly hit new highs. As for the currency market, domestic and foreign experts unanimously agree that, post-war, the Australian dollar is the most benefited foreign currency. Even if the current ceasefire reverses again and again, it might be worthwhile to take advantage of the big turnaround in risk aversion “U turn.” Once risk currencies are sold off and there are opportunities in danger, a break below 0.7 could be a good entry point for the Australian dollar.

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CITIC Bank (International) Personal and Business Banking Investment Director Zhang Haowen said that from now until the first half of the year, he is optimistic about the Australian dollar and Japanese yen.

First, about the Australian dollar, Zhang Haowen believes that Australia’s March inflation annual rate rose to 4.6%, and core CPI remains high at 3.3%, continuing to deviate from the central bank’s 2% to 3% target range. The Reserve Bank of Australia (RBA) raised the benchmark interest rate to 4.35% at its May meeting, and with the widening interest rate differential, the Australian dollar outperformed other major currencies. However, attention should be paid to the fact that Australia’s consumer confidence index in April fell to 80.1, the lowest since mid-2023, indicating that high interest rates and inflation pressures are suppressing domestic demand. If future weak domestic demand leads to slower economic growth or rising unemployment, the RBA may end its rate hike cycle or shift to a more neutral stance, which would be a major obstacle to the Australian dollar’s appreciation. The AUD/USD forecast for the first half of 2026 ranges between 0.6664 and 0.75.

CITIC International expects the Australian dollar to challenge a new high of 0.75 in the first half

OCBC Hong Kong Economist Wang Hao-ting also agrees, considering that the Australian dollar currently offers the highest carry yield among G10 currencies, and expects this to continue supporting the AUD’s outperformance, with a year-end target of 0.75 against the US dollar.

Last Tuesday (May 5), the Reserve Bank of Australia (RBA) approved a 25 basis point rate hike to 4.35% with an 8-1 vote, less divided than the previous 5-4 vote. Most members (including Governor Bullock) cited ongoing upside risks to inflation and CPI expectations as the basis for tightening policy. Wang Hao-ting predicts that in the next two weeks, support for AUD/USD will be around 0.7078, with resistance at 0.7278; the long-term trend forecast suggests a mid-year level of 0.71 and a year-end target of 0.75.

On Monday before the rate decision, AUD was at 0.7167; today (May 12), it is at 0.7239.

DBS’s Lee Ruofan predicts short-term resistance at 0.7228

Expert forecasts for AUD and interest rates:

• Citibank Investment Strategy and Asset Allocation Head Liao Jiahao: The RBA is expected to raise rates again by 0.25% in June to 4.6%, ending this rate hike cycle; but the AUD is unlikely to break above 7.3 in the near term.
• DBS Hong Kong Global Markets Strategist Lee Ruofan: Rumors of a US-Iran ceasefire temporarily pushed the AUD above 0.72, reaching about 4-year high of 0.7228; but it seems to lack momentum to go higher. Since mid-last year, the interest rate advantage and strong commodities have supported the AUD’s outperformance. However, after the RBA’s third consecutive rate hike last week, the central bank said it would pause to assess the impact of recent hikes. With net long positions in AUD at their highest since March 2013, further appreciation may be slow. Risks to the downside include worsening US-Iran relations, but the decline is expected to be limited, with initial support at the 50-day moving average, around 0.7062, and a psychological support at 0.7. Short-term support is at 0.697, resistance at 0.73; AUD/HKD support at 5.455, resistance at 5.715.
• National Australia Bank (NAB): Australia is expected to raise rates again by 0.25% in June.
• UBS: Forecasts for AUD at 0.72 at the end of this quarter and 0.74 by year-end. The market has some imbalance in directional positions, but improving fundamentals support a strong AUD.

Additionally, AUD fixed deposits are becoming a new battleground in Hong Kong banks, with recent increases in deposit rates across banks. UBS expects the AUD to challenge 7.4 by year-end, about 2% higher than current levels, with a 1-year fixed deposit rate of 4.4%, giving a total yield of about 6.4%.

AUD fixed deposit offers:

• OCBC Hong Kong: 1-week at 16.8%
• Chong Hing Bank: 3 months at 4.3%
• CITIC International: 3 months at 4%
• ICBC Asia: 1 year at 4%
• CCB Asia: 1 year at 4.05%
• Fubon: 3 months, 6 months, and 1 year at 4.4%
• Bank of China Hong Kong: 1 week at 13.8%
• Hang Seng Bank: 1 week at 17%; still the “high-yield king” with a threshold of HKD 1 million for the deposit.

Citi’s Liao Jiahao maintains the forecast of three rate cuts by the Fed this year

Expert forecasts for Federal Reserve rate cuts

Three cuts this year:

• Liao Jiahao from Citi: Citi analysts expect the Fed to cut rates three times this year, in September, October, and December.

Two cuts:

• So Ho-ching, Investment Director at Hang Seng Investment Management: Maintains the forecast of two rate cuts this year, likely in Q4. Although Middle East tensions have driven inflation higher, inflation remains relatively controlled so far. The conflict may also slow external economic growth, providing a reason for the US to maintain easing policies.

One cut:

• Goldman Sachs expects the first cut in December: Due to persistent US inflation, the timing of the two rate cuts has been pushed back to December and March next year. Rising energy prices have fed into core personal consumption expenditures (PCE), keeping core PCE at 3% for the year, above the Fed’s 2% target, delaying the conditions needed for easing. To cut rates, the Fed would need inflation to decline after oil supply shocks subside and the labor market to weaken further.
• Ding Meng, Chief Economist at CITIC Bank (International): Forecasts one rate cut in the second half of this year, by 0.25%. Zhang Haowen expects the US dollar index to range between 95 and 102 in the first half of 2026.
• Chien Cheng-luo, Head of Investment Strategy at Standard Chartered Hong Kong Wealth Solutions: Expects the Fed to cut 0.25% in Q4. The US-Iran conflict has already fully reflected in capital flows into the dollar, with the dollar expected to fluctuate between 97 and 100. The outlook for the second half depends on the new Fed chair’s policy, but with Europe, Australia, and Japan having room to raise rates, narrowing interest rate differentials, the dollar could fall further to around 96.
• Wang Hao-ting from OCBC: Maintains the baseline forecast of one rate cut, but due to ongoing short-term inflation risks, the timing could be delayed from Q3 to Q4; the latest year-end target for the dollar is 97.15.

Delay until early next year for rate cuts:

• Morgan Stanley: Given persistent high US inflation and resilient economy, expects the Fed to start cutting rates only next year. Inflation remains above 2%, and recent data show strong economic growth and labor markets, reducing urgency for easing. As inflation pressures ease and growth slows to trend, rate cuts are expected in January and March next year. With market risk appetite improving, the dollar is expected to decline further to around 95 in the coming months.

Hold steady:

• HSBC: Expects the federal funds rate to stay between 3.5% and 3.75%.

Zhang Haowen expects the Japanese yen to range between 152 and 161 in the first half

On the yen side, Zhang Haowen believes that Japan, as a country heavily dependent on energy imports, is facing stagflation risks amid soaring international oil prices. High import costs not only push inflation higher but also drag down economic fundamentals, limiting yen appreciation. Nonetheless, the yen still has opportunities for a phased rebound. Although the April BOJ meeting kept the benchmark rate at 0.75%, it was rare to see three members advocating an immediate hike to 1%, indicating increased hawkish internal forces.

Zhang Haowen also said that in March, Japan’s nationwide core CPI exceeded expectations, and export-import data improved, significantly boosting market expectations of a rate hike in June, providing support for the yen’s rebound. Overall, in the short term, the yen is expected to rebound to 152-154 due to rising rate hike expectations. If the June hike materializes smoothly and Middle East tensions ease, leading to falling oil prices, the yen could further appreciate to 148-152 in the medium term. However, high oil prices and slowing economic growth remain major obstacles; if crude oil stays high, yen appreciation will be limited. The USD/JPY forecast for the first half of 2026 ranges between 152 and 161.

DBS’s Lee Ruofan adds that although there was a brief escalation in US-Iran conflict, the dollar failed to break 98.6, and with hopes of de-escalation, oil prices plummeted to around $100, causing the dollar to repeatedly fall below 98. Last Friday’s US non-farm payroll data was mixed, with consumer confidence and inflation expectations below forecasts, weakening market expectations of a rate hike by the Fed this year, and causing US dollar and Treasury yields to retreat.

This year, the AUD has surged by up to 10%, while the New Zealand dollar may catch up, supported by New Zealand’s Q1 employment data favoring rate hikes. The NZD is expected to fluctuate between 0.577 and 0.606. Additionally, before the China-US summit, unexpectedly strong trade data from China supported the renminbi’s strength, though the appreciation may be slow.