APAC Market Bulletin: A Year in Review and a Look Ahead

Welcome to FX in Focus. Our mission is to celebrate the talent and ideas that contribute to the global B2B payments industry. Our series showcases industry thought leaders addressing the big and pressing issues and sharing their vision on a variety of topics. I'm your host, Helen McBain and I'm joined by our APAC Managing Director, David Brishon, and our APAC Currency Strategist, Peter Dragasevich.

Peter and David will be looking at how the year 2025 ended up and what might be in store this year. I'm going to hand over to David to get us started. Thanks, Helen. These chats are becoming a bit of a tradition for us, Pete.

I really enjoy them. first question how would you describe 2025 what are the what was some of the key macro themes hi thanks Dave yeah what a year 2025 turned out to be as an analyst it was fascinating there was always plenty of stuff to talk about with clients there were times if you remember where things were changing pretty drastically on a daily basis in a nutshell across markets I think the last year was chaotic at times and then arguably a bit more complacent at others.

There were these big bursts of volatility and then periods of relative quiet. This isn't unusual. It does reflect the fact that markets are driven by outcomes compared to what people are expecting. And it needs to be remembered when it comes to markets that things don't necessarily have to be good or bad.

It's rather what they are, whether they're better or worse than what's anticipated. So again, if you think about last year, what was driving all of this, it was really what was happening in the US. The first year of President Trump's second term was disruptive, but that's what he really campaigned on. The Trump administration implemented several major policy changes like sweeping trade tariffs.

They challenged geopolitical norms. And even towards the end of the year, they were openly trying to undermine the independence of the central bank. But really, it was that period around Liberation Day which got markets off guard. And predictions about growth turned very bearish very quickly in hindsight, only for Trump to quickly strike those beautiful, wonderful deals, which saw markets turn around pretty quickly.

So again, a lot of volatility. But then as the year rolled on, I think markets were caught off guard again just by underestimating the positive impact of the AI boom with businesses around the world having to invest a lot in technology. You know, think about the stock market. All those tech stocks have really propelled the market higher.

But in the real world, those productivity gains are really starting to help fight inflation. And then obviously outside of the US, growth has actually been okay. It wasn't the disaster people were expecting. A large part of that is because of that AI investment boom.

But also a lot of trade flows were rejigged and interest rates were lower in a lot of countries. So that helped kind of cushion the blow from the Trump policies as well. Okay. Just bringing it a bit locally, what were the impacts on the regional and Australian economy?

Regionally, again, economic outcomes were better than predicted, particularly compared to that initial post-liberation day kind of period. Across Asia and in China, growth held up and even picked up some steam towards the back end of last year particularly in those economies and countries plugged into that AI chain as I mentioned Stimulus in China also helped The authorities there were injecting a lot of measures aimed at supporting domestic growth and to cushion that kind of US tariff impact.

You know, on net, what's interesting is Asian and Chinese exports actually grew over the year. Shipments to the US declined, but trade with other nations stepped up and more than filled the void created by the US kind of turbulence. And in Australia, things were OK without being great. It looks like the economy grew by about 2%, which is actually the current speed limit for the economy.

I can't really grow much faster than that without generating a lot of inflation. So as I was pointing out during those periods of kind of tariff related market stress, you know, Australia doesn't really have that big of a direct trade relation with the US. So it wasn't really going to be caught up in directly in the tariff kind of noise. It's more linked to Asia and to China and they were doing OK.

Added to that, you know, you've got to remember Australia's population has been growing. It's putting strains on a lot of kind of things like infrastructure. But those volumes, those extra people floating around does support volume. So it does kind of help support growth.

And then we also had the RBA cutting rates a couple of times last year, which kind of helped housing and spending. Now, the question is going forward, the RBA is starting to hike rates, whether that's going to start to cool down from here. Okay. Getting back to what we do best, how did this flow through into currencies and particularly the Australian dollar?

Yeah, look, when it comes to the US dollar and other currencies like the Aussie, the path that we saw last year was actually very, very similar to the first year of Trump's first term in 2017. So what initially happened was there was this big ramp up in expectations after the election about what all these policies are going to mean for U.S. growth and inflation.

And he saw the U.S. dollar rise and say the Aussie fall. But then the reality hit and the self-inflicted kind of wounds on the economy started to show up and the U.

S. dollar fell away as last year unfolded. So the U.S.

dollar index actually declined by nearly 10 percent last year. which was the biggest annual drop in over 20 years. So this softer or weaker US dollar and domestic kind of issues like the RBA changing and pivoting to become more hawkish have helped the Aussie climb higher on net. But clearly it wasn't a straight line.

As I mentioned, there was that acute bout of volatility around Liberation Day in April. However, things quickly settled. and on net the Aussie traded in an 8 cent range last year which was actually on par with the previous few years. You know you get a lot of headline and noise but that's actually not as wide as it has been.

Historically the Aussie has on average traded in a 13 cent range each calendar year since the float. So last year seemed like it was a volatile year but in reality it wasn't as volatile as what we've seen before. Okay. There's been a lot of talk in the media about the US dollar losing its dominance and other currencies filling in the gaps.

Is this realistic at all, Pete? Oh, look, it's a question that comes up whenever the US dollar starts to weaken. I think people seem to forget that currency is moving cycles There an appreciation cycle and a depreciation cycle as the economy and interest rates kind of evolve And the US is now in the the middle of that of a depreciation cycle as the economy and interest rates kind of evolve And the US is now in the middle of a depreciation cycle purely because the US economy isn't as strong anymore.

US interest rates are starting to come down, and people are starting to factor in a bit more risk premium because of all the Trump policies. But this whole de-dollarization theme and push, I don't think it's something that's likely to happen in concrete steps for quite some time, probably decades in reality. You've got to look through the weeds and there's a lot of structural demand for US dollars around the world. That's because, one, it's got a huge and liquid capital market in the US.

there's still a huge elevated level of foreign currency denominated debt in US dollars around the world and there's a high proportion of US dollars in FX reserves. You know when you look at the numbers at last count the US dollar was bought and sold in nearly 90% of all global FX transactions. 60% of global FX reserves are in US dollars and really the appetite for US government debt from offshore investors hasn't really waned that much. And the big thing is there is no real major alternative in terms of asset markets to be able to kind of fill the void.

Europe's pretty big, but it's still only a proportion of the size of the US markets. And even if you think about China, capital flows in and out of China are still very heavily controlled. So they're not free, open markets, which is what you need. So again, it's a long-term kind of view.

You need to take decades for the US dollar's dominance to really wane. Okay, let's look at what you see coming for the rest of 2026. What could be some of the important factors driving the global economy and FX markets? And what do you think is going to happen with volatility?

Oh, look, if I look at markets where they are now, I think they're priced for perfection. If you think about measures of volatility in equities and bonds and FX, they're all below average. Equity markets are at all time highs. Various commodities like gold, silver, lithium have all jumped up a lot in a very short space of time.

Equity valuations are very stretched and credit spreads are tight. Now, to me, that's kind of saying that the markets are probably a little bit more complacent than they should be, because there's still a lot of risks out there. There's a lot of risks around the global economy still. You never know what Trump is going to tweet at any given time.

So I think this is a point where if you think about where markets are actually priced, they could really get caught out. So I would think volatility or bursts of volatility should be anticipated. This kind of calm, quiet period in markets probably won't persist. And there's a lot of things on the horizon, like what the impact of tariffs will have on US growth and jobs, how the Fed will change under Trump.

There's a new chair starting in May, which Trump has appointed. So that could kind of shake things up. There's still a lot of geopolitical issues around the world. There's question marks about whether the AI boom really has legs in the real world and whether these valuations of a lot of AI companies and tech companies are justified.

And then at the end of the year, there's a big congressional election in the US and there's a chance that Trump power could be diluted a bit with the Republicans kind of losing the house So I just think things just look too calm at the minute and people shouldn really be complacent and need to be ready to capitalise on hedging these risks when the opportunities kind of present themselves. Okay, in terms of the Aussie and the Kiwi, are you bullish or are you going to get the bear suit out of the cupboard?

No, look, I'm for both Aussie and more so Kiwi. They've had a flying start to the year. I think it's the best kind of six-week period at the start of a year for the Aussie in about eight years. So I'm definitely more glass half full than glass half empty, particularly the Kiwi.

As I said, in New Zealand, the economic cycle is becoming more positive. The New Zealand economy was hit very hard by very high interest rates, all designed to crush inflation. but now the rbnz's obviously been cutting rates very quickly and the new zealand economy is showing signs of life so growth is improving the labor market's healing and probably the next move by the rbnz probably will be a rate hike later this year just as it as it starts to take its foot off the gas and and tries to kind of cool things off but that normally translates to a stronger kiwi So I do think it can kind of push up towards 62, 63 cents later this year.

Now for the Aussie, I think a lot of the positive drivers I've been assuming would take hold have clearly been working. And it's been propelled up to above 71 cents recently. These levels we haven't traded in for since early 2023. You know, short term, I do think the Aussies probably moved up too far too fast.

and some of the heat could come out of it. But on balance, I don't think it should fall that far, kind of below 69, 70 cents, that kind of region, given there's the outlook for one, maybe two more rate rises by the RBA, and the fact that the global economy is actually improving. That said, I don't think and don't believe that the Aussie is going to push that much higher than where we've actually been trading recently. You know, you've got to remember the RBA's rate hikes are designed to slow growth.

That'll push up unemployment and bring down inflation. And all of those kind of negative economic impacts from those rate hikes probably start to show up in a few months. And that can take a bit of the gloss off the Aussie. And so I do think that, you know, around 72, maybe 72.

50 could be a bit of a ceiling for the Aussie. But the bottom line, particularly for clients, is that I think the Aussies should trade in a higher average range than what we've seen the past few years. Again, the last couple of years, the Aussies averaged around 65, 65.5 cents.

That average is probably going to be closer to 70, I think, over the next 12 months or so. Thank you. That brings us to the end of our conversation today with Peter and David. I want to thank them both for their time and also thank you to our listeners.

If you have any questions or comments or recommendations for further podcasts, you can email us at podcast at corpay.com. FX in Focus is a podcast written and produced by Corpay. The opinions expressed are those of our speakers and do not necessarily reflect the views of Corpe.