May 2026 Monthly

The global capital markets will enter May with a sense of transition rather than resolution. Neither the Federal Reserve, nor the European Central Bank or the Bank of Japan meet in the month ahead. The market is inclined to see the third consecutive hike by the Reserve Bank of Australia but the other G10 central banks that meet in May, Norway's Norges Bank and Sweden's Riksbank are mostly likely to stand pat. 

The aggressive tightening cycle that investors had penciled in during the first part of the Middle East war has been unwound, though not completely. Markets have been forced to recognize that the inflation threat is not over. The March readings were firm, and the April reports are unlikely to offer relief. The spill over into core prices is becoming more visible, which complicates the narrative.

The geopolitical backdrop has shifted but not settled. The war in the Middle East is unresolved, and the disruptions are multifaceted and will linger. Shipping routes, insurance costs, and regional supply chains will not snap back quickly. The regional geopolitics will not return to status quo ante. Pakistan is a nuclear power, and its regional role has increased. US bases were once seen as protection and may be re-evaluated.

Federal Reserve in Flux

In Washington, the Federal Reserve faces its own uncertainty. Chair Powell’s term ends mid-May. The Justice Department ended its probe in the Federal Reserve's renovations on April 24 and this removes the main obstacle to the confirmation of Kevin Warsh to succeed Jay Powell as chair.  There is no FOMC meeting in May, and we expect Warsh will lead the next meeting in mid-June, when the Summary of Economic Projections is updated. We continue to suspect that there is a reasonably good chance that Powell stays on to complete his term as governor (January 2028). 

In his confirmation hearings, Warsh made it clear that his tenure was going to be a break from the period of great continuity from Bernanke through Yellen, and Powell. The targeted measure of inflation may change, and Powell's average inflation rate target may be jettisoned. The Summary of Economic Projections will be re-thought. Maybe wide latitude that the regional Federal Reserve presidents enjoy in terms of publicly expressed views, will be restrained. 

There are two initiatives that are possible with Bessent at Treasury and Warsh at the Fed. First, there could be a new accord between the Federal Reserve and Treasury. The markets will be sensitive to any formal erosion of the central bank’s operational independence. 

Second, gold is being carried on the US government books at a little more than $42 an ounce or around $11 bln. Some administration officials have argued that it should be re-valued. Given gold’s volatility, pricing at the market seems imprudent. But some rule, like its lowest price in ten years, would allow the yellow metal to be valued at $1000 an ounce and boost the asset on the federal government’s books to $262 bln. At $2000 an ounce, more than a 50% haircut from market prices, it would boost the federal government's assets by more than $500 bln. 

Chinese Restraint

One of the highlights of the month will be the meeting between President Trump and President Xi. The United States has acknowledged Beijing’s role in persuading Tehran to accept the ceasefire. This recognition may help create a more constructive atmosphere for the summit. China has shown more restraint than the conventional narrative in the United States tends to allow.

Despite the volatility in global markets, the People’s Bank of China has permitted a modest appreciation of the yuan. It has steadily lowered the dollar’s reference rate, around which the greenback is allowed to move two percent, although the band is rarely used even halfway. This is not the behavior of a country looking to weaponize its currency. The yuan reached its best level in three years, and the official campaign does not look over.

Beijing’s posture in the Asia Pacific region also runs counter to some of the louder commentary. With the United States drawing down parts of its arsenal and diverting assets from the region to support operations in the Middle East, some analysts expected China to test the boundaries around Taiwan. That has not happened. In fact, April saw the first visit in decades by the head of Taiwan’s opposition Kuomintang party to Beijing. Cross-strait flights will reportedly resume. These may be symbolic gestures, but symbols matter. They can signal a willingness to explore political space that had been closed off for years.

China has also cut tariffs on imports from roughly fifty African countries. The move is consistent with its long standing strategy of cultivating influence through trade and investment rather than military presence. It also comes at a moment when the United States and China have maintained a tariff truce that extends into November. There is room for a broader deal. Taiwan and critical minerals remain sensitive issues, but both sides have incentives to avoid escalation.

The Way Forward

For investors, the challenge is to separate noise from signals. The macro narrative is not as clean as it appeared in January. Inflation is proving sticky and supply disruptions are evident across a broad range of activity. The Fed’s leadership is uncertain. The geopolitical landscape is shifting in ways that do not fit neatly into the familiar frameworks. Yet the underlying story is one of continued pressures that could presage a more acute crisis. Markets are recalibrating to a world where policy is less predictable, supply chains are more fragile, and diplomacy is more transactional.

The month ahead may not deliver clarity. What it offers instead is a chance to observe how policymakers and markets respond to a set of pressures that are unlikely to fade soon. The task for investors is to stay alert to the subtle shifts that sometimes matter more than the headline events.

Bannockburn World Currency Index

Bannockburn's World Currency Index, a GDP-weighted basket of the currencies of the dozen largest economies, recovered from its nearly 1.5% loss in March. That was its first monthly decline since last October and its largest drop since the end of 2024. It rebounded by about 1.35% through April 24. The recovery reflected the fact that all of the components of the index, but the yen appreciated against the dollar. BWCI reached its best level since September 2024.  

The Australian dollar fared the best with the G10 members of the index and rose by about 3.3%. It has been supported by the rate expectations and commodity exposure. Sterling was second best with around a 2% gain, followed by the Canadian dollar's 1.7% rise. The yen slipped by about 0.5%. 

Among the emerging market currencies in Bannockburn's World Currency Index, the Russian ruble's almost 8% surge stands out. It fell 5.3% in March. The US has allowed more Russian oil to be bought, for which it is securing higher prices. The central bank delivered its fifth consecutive rate cut on April 24 (benchmark rate now stands at 14.5%, and additional cuts are likely). The ruble's weight in the BWCI is modest at about 2.4%. The Brazilian real, Mexican peso and South Korean won rose 2.8%-3.2%, and together account for about 6.5% of BWCI. The Indian rupee rose by 0.6% and the Chinese yuan rose by 0.9%. Together they account for around a quarter of the index. 

We are not persuaded that the new high in BWCI signals a breakout. The fog of war continues to cast a heavy pall over the investment climate and risk appetites. The US continues to bring more people and equipment into the region. The US with its energy supplies, record exports of petroleum products, and more flexible institutional arrangements facilitates a relatively resilient economy. The April retreat in the greenback after the March rally leaves somewhat oversold as the month winds down. Consolidation or a dollar recovery looks likely before the medium-term downtrend resumes. 

U.S. Dollar:  The dollar appreciated in March, the first month of the war, but has trended lower in recent weeks. The Dollar Index matched its longest losing streak in fifteen years (eight consecutive sessions). It had rallied about 5.3% from the lows in late January that began as the US seemed to drop its threat of taking Greenland by force. By the time the war began, the Dollar Index had already appreciated 2.5%. The combination of technical factors and a fragile optimism that the Middle East war would not last long saw the dollar trend lower in April. Among the G10 countries, the US is the only one that the derivative markets are discounting the possibility of a cut. Before the war began, the futures market was discounting two cuts and around a 40% chance of a third. The war-induced swing in expectations was dramatic and a month later, there was almost 60% chance of priced in the futures market. US Treasury Secretary Bessent's remarks about it being understandable for the Federal Reserve to monitor the supply shock, he seemed to be creating political space for Powell's successor to maintain steady policy without incurring the rather of the administration. Here in late April, almost a 30% chance of a cut is discounted before the end of the year. Yet the greenback's slide has stretched the momentum indicators and the optimism about an end to the war by the end of April is fading. This can set the stage for counter-trend dollar bounce before what we see as its long-term decline continues. 

Euro: The euro recovered what it had lost in March. It reached almost $1.1850, its best level since February 18. On an intraday basis, it best a key technical retracement of its losses since the year's high was recorded amid the furor over Greenland in late January, near $1.2080. The roughly 4.25-cent rally from the mid-March lows has stretched the momentum indicators and the US two-year premium over Germany has stabilized after falling to its narrowest since late 2021. Before the Middle East war began, indicative pricing in the swaps market implied better than 50% chance the ECB was going to cut rates this year. The supply shock has dashed those ideas, and at the extreme on March 24, the swaps market had a little more than three hikes fully discounted. The pendulum has swung back a bit, but the market is pricing in two hikes this year and almost a 50% chance of a third. The first hike is not completely priced in until July, but, of course, the situation and expectations are fluid. The supply shock poses growth risks. In addition, the shortage of jet fuel and rationing in some countries will disrupt trade, businesses, and tourism. Meanwhile, the seemingly eternal struggle is once again expressing itself. Some see the crisis as an opportunity to broaden and deepen the EU bond market. Yet the opposition by some creditor countries has not relented. The lack of a joint effort risks further deepening the divergence that makes governing difficult. 

(As of April 24, indicative closing prices, previous in parentheses) 

Spot: $1.1722 ($1.1509) Median Bloomberg One-month forecast: $1.1712 ($1.1607) One-month forward: $1.1738 ($1.1525) One-month implied vol: 5.8% (7.8%)

Japanese Yen: The dollar reached almost JPY160.50 in March, its best level since July 2024. It traded above JPY160 in April once and barely. Instead, the greenback tested the lower end of its recent range near JPY157.50, which was also seen in March. Unlike many other pairs, the dollar-yen remained well above the level that was prevailing before the Middle East war, which was around JPY156. The war boosted uncertainty for investors and policymakers. Bank of Japan Governor Ueda had opportunity to prepare the market for a rate hike but failed to do so. This encouraged the swaps market to unwind the expectations for a hike on April 28. The odds of a hike fell from almost 75% on April 1 to less than 7%. The probability of a hike in June is near 65%, and it is nearly fully priced in for the late July meeting. Core inflation (excludes fresh food) fell below the 2% target in February for the first time since March 2022 and remained below it in March. The economy contracted in Q3 25, and it appears to have taken two quarters to recoup the lost output. The financial crisis many economists anticipated has not materialized. The very long-end of the Japanese bond market peaked on January 20, and the 30-year yield is around 20 bp lower and the 40-year yield is off a little more than 35 bp. The Nikkei reached a record high. Foreign investors have bought JPY7.28 trillion (~$46.5 bln) of Japan equities in the first 16 weeks of the year compared with net sales of JPY2.07 trillion in the same year ago period. 

Spot: JPY159.38 (JPY160.31) Median Bloomberg One-month forecast: JPY158.24 (JPY158.52) One-month forward: JPY158.98 (JPY159.90). One-month implied vol: 7.3% (9.9%)

British Pound:  Sterling fell about 1.9% in March and recouped it fully in recent weeks. A four-month low was set at the end of March near $1.3160, and sterling rebounded to almost $1.3600 in mid-April. It had settled slightly above $1.3480 before the Middle East war began. The UK economy entered the war a bit firmer than it initially appeared. January GDP grew by 0.1%, after the initial estimate was flat, and February GDP was stronger than expected, with output rising by 0.5%. That matches the strongest monthly performance since June 2023. The March PMI, which saw the flash readings marked down in the final report, while the preliminary April readings underscore the resilience of the economy. Before the war began, the swaps market was discounting two Bank of England rate cuts fully and about a 10% chance of a third. At its peak on March 20, it was pricing in three rate hikes and almost a 40% chance of a fourth. Now, it is discounting two hikes and an almost 20% chance of a third. The UK holds local and mayoral elections on May 7. A poor showing by Labour would likely increase the political pressure on Prime Minister Starmer, who is still reeling from the criticism over the appointment of Peter Mandelson as the UK ambassador to the US, who had failed the security vetting process. 

Spot: $1.3532 ($1.3259) Median Bloomberg One-month forecast: $1.3469 ($1.3306) One-month forward: $1.3535 ($1.3260) One-month implied vol: 6.7% (8.4%)

Canadian Dollar:  After it reached a new high for the year at the end of March near CAD1.3965, the US dollar pulled back in the first half of April. Support was found around CAD1.3630 and the greenback recovered to CAD1.3715 area. The economy remains vulnerable, but prices pressures remain too elevated to give the central bank much room to respond. Despite cutting rates 100 bp last year and 125 bp in 2024, the economy lost full-time positions in February and March, which is the most for a two-month period in nearly five years. The composite PMI has been below the 50 boom/bust level since November 2024, with one exception (October 2025). Headline inflation jumped to 2.4% in March (from 1.8%), approaching last year's high, which was the strongest pace since mid-2024. Core inflation slowed to 1.9% from 2.0%, but it is likely to rise in the coming months amid the secondary impact of higher energy costs filter through the economy. Before the war, the swaps market had around a 40% chance of a cut discounted and its peak on March 20 was a little more than then three hikes were fully priced. Now, one hike and about 50% of a second is discounted. Meanwhile, as part of the review of the USMCA, the US is discussing boosting the domestic content requirement of US production, especially in the auto sector.

Spot: CAD1.3668 (CAD 1.3893) Median Bloomberg One-month forecast: CAD1.3683 (CAD1.3795) One-month forward: CAD1.3651 (CAD1.3875) One-month implied vol: 4.2% (5.2%)

Australian Dollar: The Australian dollar remains one of the strongest G10 currencies. It has risen in two of the three months in each of the past three quarters. In mid-April, the Australian dollar reached almost $0.7225, its best level since mid-2022. The government has cut fuel taxes and launched an interest-free loan facility for small businesses. The 26/27 budget will be unveiled on May 12. The Reserve Bank of Australia has been the most aggressive G10 central bank this year. It has hiked its cash rate twice, and hawkish rhetoric has fanned speculation of a third that the conclusion of the central bank meeting on May 5. The futures market is discounting around 75% probability. Inflation remains elevated and household spending is robust. Still, there are some preliminary signs that economic activity is cooling. The March composite PMI plummeted to 46.6, its weakest level since November 2023. The preliminary April PMI was better, but the disruption from the Middle East war will likely take a toll. While we look for additional Australian dollar gains in the medium term, we see risk of a downside correction after likely rate hike in early May. 

Spot: $0.7152 ($0.6874) Median Bloomberg One-month forecast: $0.7126 ($0.6950) One-month forward: $0.7149 ($0.6875) One-month implied vol: 9.0% (11.8%). 

Mexican Peso: The peso rose by about 0.4% in Q1 26 and around 3.1% month-to-date in April. The peso is the fifth strongest emerging market currency this year, and Latam currencies account for three of the top five emerging market currencies. In late March, despite both headline and core inflation above the upper end of the 2%-4% target range, the central bank cut its overnight rate target to 6.75% from 7.0%. The dollar rose to its best level of the year against the peso (almost MXN18.1650) at the end of March. The gains were unwound and the dollar fell to MXN17.1275, its lowest level since before the Middle East War began. The low since June 2024 was recorded on February 18, near MXN17.0865. The central bank meets on May 7. While a cut is unlikely, Banxico has signaled that its concerns about economic growth could warrant another rate cut. The renegotiation of the USMCA pact poses risk for the peso. Mexico has moved to ease tensions over access to the country's electricity generation sector. We suspect there is scope for the dollar to recover into the MXN17.50-MXN17.65 area in the coming weeks. 

Spot: MXN17.3787 (MXN18.1188) Median Bloomberg One-month forecast: MXN17.5322 (MXN17.9743) One-month forward: MXN17.4237 (MXN18.1655) One-month implied vol: 8.9 (13.9%)

Chinese Yuan:  By nearly any metric one uses, the yuan is undervalued. For reasons that have been articulated by Beijing, since around the middle of last year, it has sanctioned a steady and modest appreciation of the yuan. Since around the end of Q1 25, officials have allowed the yuan to rise. Its gain against the dollar is almost 6.5%. It has appreciated against all the regional currencies but the Malaysia ringgit. The yuan has risen by more than 12% against the yen, more than 6.7% against the South Korean won and around 1% against the Taiwanese dollar. It has also appreciated against several G10 currencies. Its trade surplus continues to cause consternation. The terms of trade (exports prices to import prices) appear to be shifting. China exports manufactured good and imports raw materials and commodities. The prices of commodities have risen relative to manufactured goods. Still, we suspect the official tolerance of yuan appreciation has not been exhausted. The easing of deflationary forces, including the first year-over-year rise in China's PPI since September 2022, and the firm 5% year-over-year Q1 GDP may encourage officials to accept more yuan gains. It may boost the chances that exchange rates are not the focus of the Xi-Trump meeting. Our next target is around CNY6.70. 

Spot: CNY6.8321 (CNY6.9112) Median Bloomberg One-month forecast: CNY6.8407 (CNY6.9067) One-month forward: CNY6.8440 (CNY6.9145) One-month implied vol: 2.8% (3.7%)

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