G10 FX Outlook 2027: It's Hard To Look Beyond The Fed

(MENAFN- ING) Executive summary

We all know that the 'big dollar' call sets the tone for global markets – and that call is largely influenced by the Fed. What seems clear as we go to press is that the central bank is not about to turn dovish. In fact, influential centrist Christopher Waller has just made his case for opening the door to a 50bp hike this December.

That hawkish, dollar-positive tilt stands in contrast to the typically negative seasonal factors faced by the dollar in December. This year, however, the dollar has enough positives to defy that pattern. US growth might slow slightly from the 3.4% quarter-on-quarter annualised rate in the third quarter but remains strong. And what seems to be a strengthening jobs market and inflation way above target look set to keep tightening expectations firm for a couple of months yet. That probably means the low-yielding yen and Swiss franc can remain on the back foot over the coming months.

It seems a difficult call to make today, but the ING house view forecasts just one 25bp Fed hike in December to conclude this recalibration of Fed policy. We are not forecasting an AI bust but are positioning ourselves at the dovish end of the Fed spectrum for 2027. Here, further pressure on the housing market, alongside lower energy prices and softer wages should give the Fed enough room to ease restrictive policy in the final months of 2027. Such an outcome feels a distant prospect right now.

An 'up then down' dollar baseline view points to relatively confined ranges in 2027. But in keeping with the theme of this outlook, 'Fat tails, slim ranges', extreme scenarios need to be considered. We look at those risks in more detail in other articles in this publication. Beyond the reaction functions of the Fed and the European Central Bank, the two most important drivers of EUR/USD will likely be the path of the AI story and the geopolitical/energy scenario.

We look at the range of possible EUR/USD outcomes in light of those risks below. As we learned last year, pushing a baseline view too heavily without sufficient regard to foreign policy possibilities can prove dangerous.

Source: ING, Refinitiv. Numbers in scenarios 1 and 4 based on 2 std moves implied by option market

"> Currency sections EUR/USD: Hope for the best, prepare for the worst

	Spot	Year ahead bias	4Q26	1Q27	2Q27	3Q27	4Q27
EUR/USD	1.11	Bullish	1.13	1.13	1.16	1.17	1.18

Fed stays hawkish through the first quarter of 2027: Underpinning dollar strength through the second half of this year has been the hawkish Federal Reserve. New Chair Kevin Warsh's commitment to restore monetary credibility has put paid to dollar debasement fears. We look for hawkish Fed pricing to remain the dominant dollar theme through the first quarter of 2027, driven by a solid US labour market, inflation still in the 3.5-4.0% area and AI investment still contributing to growth. Our baseline sees the dollar turning lower in the second quarter, when inflation will be falling back to 2.0% and money markets will be questioning whether the Fed needs to keep policy at 100bp above neutral with inflation back at target. This assumes one Fed hike this December to 4.25% and that the Fed is able to cut rates at the end of 2027.

ECB to deliver final hike in December: The eurozone economy has put in a resilient performance this year despite higher energy prices. The European Central Bank (ECB) has already hiked rates twice this year and is expected to hike to 2.75% in December. That should be enough to contain inflation, which is still largely driven by energy. Second-round effects are nowhere to be seen. Our team sees eurozone growth slowly picking up through 2027 to deliver full-year growth of 1.2%. Like the Fed, we think the ECB will have room to ease restrictive monetary policy towards the end of 2027. There will also be a focus on who succeeds ECB President Christine Lagarde by next February. Klaas Knot and Pablo Hernández de Cos have made it to the final round. A sea change in ECB policy looks unlikely, given that a new chief economist will balance whoever gets the top job.

EUR/USD baseline and risks: Speculators are well on their way to building extensive short euro positions. The data suggests the European buy-side, just as was the case in early 2025, is prepared to hold positions in US assets with very low FX hedge ratios. Our base case assumes continued trading in a 1.10-1.15 range over the next four to five months and then a modest rebound towards 1.18 by end-2027 as US inflation drops and the Fed loosens restrictive policy. At a time of a resilient US economy, a lower EUR/USD is probably the more vulnerable side over the coming months. This could potentially be driven by a large spike in energy prices or the French budgetary situation curtailing any further ECB hikes and, in an extreme case, triggering ECB bond market intervention. The most pressing upside EUR/USD risk is probably a much deeper stock market correction, with US consumers hit by wealth effects and the market swinging towards Fed cuts, not hikes.

USD/JPY: Friends in high places

	Spot	Year ahead bias	4Q26	1Q27	2Q27	3Q27	4Q27
USD/JPY	160.00	Bearish	158.00	158.00	155.00	152.00	152.00

160 remains the line in the sand: Ever since Washington joined Tokyo's defence of the yen in late July, USD/JPY has not been able to hold a move above 160. The first joint intervention to support the yen since 1998 sent a strong signal of aligned interests. Japan does not want a weaker yen to make the cost of living any worse. Washington does not want a higher USD/JPY to drag the USD/Asia complex with it, undermining efforts to level the playing field for US manufacturers. Even though the US Treasury only intervened in small amounts of EUR/JPY at the time, the commitment to keep USD/JPY under 160 looks clear. A hawkish Fed makes that task harder, but the Bank of Japan (BoJ) should be closing the rate gap. We look for a hike to 1.50% in December and then another in March. A pronounced turn lower in USD/JPY may not emerge until the second quarter of next year, however, when we have short-dated US rates finally starting to drop.

Takaichi tries to reflate the economy: Prime Minister Sanae Takaichi's policies are focused on building strength both domestically and internationally. Domestically, her party, the Liberal Democratic Party (LDP), is pursuing a strategic JPY370tr investment target by 2040, utilising both public and private money, targeted across 17 strategic sectors. Growing at around 0.8%, the Japanese economy is already around trend output, and Japan may be one of the few G10 economies with a positive output gap in 2027. This means the BoJ could be one of the central banks to hike more than expected or be among the last to cut rates in a global downtrend. This backdrop is keeping the BoJ hawkish and the focus on whether corporate profits are still driving wages higher. Recent evidence suggests they are, which is one of the reasons why the BoJ has recently concluded that its 2% inflation target has been stably met. A key focus in 2027 will be whether Japan can use productive investment to offset its labour shortage challenges.

Yen remains cheap: Driven by years of low inflation and nominal depreciation, the real trade-weighted yen remains exceptionally weak. We estimate that USD/JPY is around 20% overvalued on medium-term fundamentals, with further yen downside now protected by the Tokyo-Washington alliance. Our call for 152 next year is largely based on the dollar decline from spring next year. The surprise package, however, could be Japan's domestic story, were the economy to start benefiting more broadly from the AI buildout. Here, Japan's role is supplying the hardware, manufacturing technology and infrastructure. We have seen in Korea this year how the AI export story has broadened into stronger domestic demand and a more hawkish central bank. Higher growth rates domestically could be an important piece of the jigsaw that finally brings home a more substantial part of Japanese earnings retained overseas.

GBP/USD: Another year of tight ranges

	Spot	Year ahead bias	4Q26	1Q27	2Q27	3Q27	4Q27
GBP/USD	1.33	Mildly Bullish	1.36	1.36	1.38	1.38	1.37

BoE matches Fed hawkishness: One abiding feature of core money markets this year was how readily traders were prepared to price in Bank of England (BoE) hikes. Sterling rates did have one of the highest correlations with oil prices, but even when Brent corrected below $100/bbl recently, markets still held onto views of a terminal BoE rate of near 4.75%. Important for the GBP/USD story is the timing of the relative US and UK inflation trajectories in 2027. Our team sees US inflation coming back towards 2% in the second quarter as energy base effects drop out. In the UK, however, the lagged implementation of the energy price caps means that inflation does not start to turn lower until the third quarter. Our call is therefore that US rates could turn lower before those in the UK, and that GBP/USD could be retesting the 1.37-1.38 range highs in the second quarter.

Some creeping optimism: It might not seem like it given that GBP/USD is still trapped in the middle of its current 1.32-1.37 range, but investors are getting more positive on the pound. The price of the one-year 25-delta risk reversal, which measures the price of a call option over a put option, is now showing the smallest skew towards GBP puts since March. That has not shown up in the FX positioning data yet, where asset managers are still running large sterling shorts by historical standards. Buy-side surveys also show international fund managers are still substantially underweight in UK equities. But positioning does present an upside risk to GBP/USD as we head into year-end. If it were to break higher, we suspect it might be driven more by surprise weakness in the dollar, however. This is because the BoE tightening cycle into next year looks fully priced.

Fiscal benefits: In a world where fiscal trajectories are being increasingly scrutinised, the UK falls on the more encouraging side of the ledger. At least the direction of travel looks encouraging for the budget deficit, while the fact that the UK has a fiscal rule, unlike the US, is welcome. We also note that the UK has quite a healthy duration on its government debt stock at 13.5 years, compared with 5.9 years for the US. The UK government's refinancing requirements as a percentage of GDP are much smaller at 8.7%, according to the IMF, compared with 30.8% for the US. Whether sterling would outperform the dollar in a major bond market sell-off remains to be seen, but the UK's debt maturity profile and near-term debt financing needs certainly look better than those in the US.

EUR/JPY: Steady, with downside risks

	Spot	Year ahead bias	4Q26	1Q27	2Q27	3Q27	4Q27
EUR/JPY	177.00	Neutral	179.00	179.00	180.00	178.00	179.00

Positive correlation with growth and equities: Both Europe and Japan have faced their struggles with high energy prices, but both economies have performed quite well. Europe has benefited from the growing fiscal stimulus put in place last year, which is starting to show through in series like German manufacturing orders. Japan's economy has been protected by the government's use of energy stockpiles, and in 2027, Japanese consumers will benefit from a large cut in VAT on food next April. Yet EUR/JPY remains positively correlated with growth and pro-risk sentiment in general and would suffer in an equity downturn. Decent advances in corporate profits suggest that a large equity correction is not a given, while forecasts for continued growth and a turn in inflation in the second half of 2027 make the case for continued equity gains and a supported EUR/JPY.

Focus on France: Japanese investors have historically been big investors in French sovereign bond markets, although these flows seem to have stalled over recent years. French debt had been seen as a higher-yielding, liquid alternative to German Bunds. However, France's unresolved budgetary situation and the threat of further sovereign downgrades urge caution. Next up is the S&P rating review on 27 November. Our base case is that the current French government passes a 2027 budget by decree and that some modest fiscal consolidation is enough to avoid dramatic downgrades. This is no 2011-2012 situation, when the market was shut to Greek sovereign issuance. Were we to be underestimating the pressure on French debt, the solution would be euro-negative, especially if the ECB needed to use its Transmission Protection Instrument, which would effectively mean restarting quantitative easing. Additionally, some slight narrowing in eurozone-Japan interest rates might encourage Japanese investors to increase hedge ratios on euro-denominated debt holdings, which would be a EUR/JPY negative.

Yen or euro the preferred funding currency? Inevitably, there will be periods in 2027 when cross-market volatility declines and investors again return to the carry trade. But what will the preferred funding currency be in the G10 space? The Swiss franc has the lowest borrowing rates, but Japanese rates should be closing in on euro rates by the end of 2027. At that point, we could be looking at the BoJ policy rate near 1.75-2.00% and the ECB rate at 2.50%. Unless eurozone growth sharply surprises on the upside and there is a substantial rotation into euro-denominated asset markets, we suspect investors will be considering euro-funded carry trades given the nature of European political risk in 2027. Assuming inflation does turn lower through 2027, we expect the ECB to be more welcoming of a weaker euro than Japan is of a weaker yen. Overall, we see a relatively flat EUR/JPY through 2027 but, again, with greater risk to the downside.

EUR/GBP: Let's not get carried away

	Spot	Year ahead bias	4Q26	1Q27	2Q27	3Q27	4Q27
EUR/GBP	0.84	Mildly Bullish	0.83	0.83	0.84	0.85	0.86

Sterling has overshot rate differentials: EUR/GBP is already trading substantially lower than interest rate differentials would suggest. Some of that is probably down to a risk premium in the euro on the back of French budgetary risk. Sterling may also be playing a limited role as a safe haven at the moment, given it trades at lower volatility than many G10 FX pairs, offers high interest rates and has a powerful fiscal rule, which means that in 2027 the UK budget deficit should narrow to close to 3% of GDP. At the same time, we think ongoing merger and acquisition inflows to the UK are playing a role here too. £141bn of deal flows have already been completed year-to-date, and there's another £260bn of pending or proposed inflows. That said, historic correlations with yield spreads suggest EUR/GBP should be trading closer to 0.86, meaning that current levels are stretched.

Low volatility to continue: The current analyst consensus for EUR/GBP is 0.86 for end-2027, with a range of forecasts stretching from 0.82 to 0.91. One of the biggest trends in this pair over recent years has been the structural decline in volatility following the political turbulence surrounding Brexit. One-year implied volatility is trading below 5%, with realised volatility trading well below 4%. That low volatility and the relatively high cost of hedging are presumably keeping hedge ratios low on sterling receivables. Assuming that the eurozone and UK economies move broadly in line next year, we see both growing at around 1.2% and doubt volatility needs to pick up markedly. The key threat to this benign environment is probably political, where risks could emerge from both sides of the Channel.

Unwinding Brexit? One wild card for the pound is the risk that Prime Minister Andy Burnham opts for early elections next year. Labour is performing well in the polls, and long-term government objectives on social care and getting closer to Europe look like they will require a mandate from the British electorate. How close the Labour Party wants to get to Europe remains to be seen. At present, Labour policy wants merely to start a conversation on the subject. But were Labour to put another referendum in its election manifesto, sterling would take a lot more positive notice. That said, an early election might not be a one-sided risk for sterling if, say, the fiscal rule were to come up for renegotiation.

EUR/CHF: SNB more tolerant of franc strength

	Spot	Year ahead bias	4Q26	1Q27	2Q27	3Q27	4Q27
EUR/CHF	0.92	Mildly Bearish	0.91	0.91	0.90	0.90	0.90

Franc plays important role in SNB policy: Having proved a popular funding currency during the summer, the rebound in the franc and the drop in EUR/CHF have been driven by lower core rates and the re-emergence of French budgetary risk. So far, the Swiss National Bank (SNB) has sounded happy to keep the policy rate at zero even while the rest of the world is tightening. Our house call remains for the SNB to keep rates unchanged, and we doubt it would tighten even if inflation nudged above 2% for a couple of months. However, much lower inflation in Switzerland than in its trading partners means that the real franc has been weakening. The SNB does not want the extra monetary stimulus of a weaker real exchange rate right now, and we suspect it will be happy with some nominal franc appreciation. We are not calling for a repeat of the FX selling by the SNB in 2022-2023 but saying that another run at 0.90 in EUR/CHF may actually suit the central bank.

Less concern over a strong franc: The minutes from the most recent SNB meeting in September reported that companies were mentioning the Swiss franc a lot less in their conversations with central bank agents. In the past, the SNB had come under a lot of pressure from the corporate sector over a strong franc, but these concerns seem to have eased. This may be a function of the strong Swiss economy this year, where growth is expected to come in at 1.5-2.0% this year and 1.5% next year. The pharma sector has been a big contributor here and is seen exporting around $115bn in 2026. Our sector experts expect a compound annual growth rate (CAGR) of 4.5% until 2030, helped in part by biologics. Also helping the sector are the exemptions from the 12.5-15% US tariffs on the sector struck by major Swiss pharma companies in return for investment in US manufacturing.

A pref erred safe haven: The franc strengthened its credentials as a safe haven during both 2025 and 2026. A solid AAA-rated issuer, twin surpluses and a net foreign asset position worth over 100% of GDP make the franc a go-to choice in the event of either a bond sell-off or European political risk, both of which are likely to be present in 2027. At the same time, the SNB has backed away from its "increased willingness to intervene", a phrase introduced when EUR/CHF briefly broke below 0.90 in March. In reality, that threat had overstated the SNB's intentions, given that it only bought CHF4bn in the first quarter and under CHF2bn in the second. We therefore expect EUR/CHF to stay offered through much of 2027, with a risk of a break below 0.90 in the event of a crisis.

EUR/SEK: Gliding back to pre-war levels

	Spot	Year ahead bias	4Q26	1Q27	2Q27	3Q27	4Q27
EUR/SEK	11.05	Mildly Bearish	11.00	10.90	10.90	10.85	10.80

Riksbank's tightening cycle should be limited: The Riksbank has clearly communicated that its baseline is for rates to reach 2.25-2.50% from the current 2.0% by mid-2027. We agree, and while the risks remain finely balanced between one and two more hikes, we are sticking to our call for just one in February or March after the latest inflation numbers materially undershot expectations. Still, our forecasts point to some upside risk to the Riksbank's 2027 inflation projections, with CPIF excluding energy and temporary fiscal measures - the central bank's favoured measure - potentially peaking at 2.5-2.7% in 2Q, compared with its 2.3% baseline. Combined with a still-solid Swedish growth outlook, that makes our Riksbank call one of the most exposed to hawkish revisions in the coming months. Importantly, we don't expect conditions for a rate cut to emerge before 2028 and estimate the long-run neutral rate at 2.25%.

Medium- and short-term factors point to a moderate EUR/SEK decline: Rate differentials have been the name of the game recently for EUR/SEK. In line with this FX Outlook's call, we think this will remain the case next year and prove a net negative for the pair. The two-year overnight index swap (OIS) rate gap is currently around 40bp, down from a peak of around 60bp in September. We expect the gap to narrow by 15-30bp over the course of 2027. The range reflects whether the Riksbank hikes once or twice, as well as markets switching more quickly to pricing in ECB rate cuts. We expect one last ECB hike in December 2026 and a cut in the fourth quarter of 2027. The growth differential should also remain moderately negative for EUR/SEK. We estimate 2027 growth at 2.1% in Sweden versus 1.2% in the eurozone. That should favour a gradual return to pre-war ranges in the pair.

Risks to our baseline: We see EUR/SEK stabilising around 11.00 into end-2026, before gradually returning to 10.80 in 2027. Risks of a bigger decline stem more from the euro side, as a busy eurozone political calendar could drive further widening in European government bond spreads and, in turn, looser ECB policy. Upside risks are mostly geopolitical. Our baseline assumes Brent returns to $70-80/bbl in 2027, a clearly optimistic scenario. SEK is less exposed to higher oil prices now, given the Riksbank's readiness to tighten, but a prolonged Gulf conflict would still argue for a more supported EUR/SEK. The inflation ramifications are particularly important: a return to a 2022-style global inflationary crisis can cause SEK losses to exceed those of 2026. A bigger threat to the krona is a potential escalation between Russia and NATO, given Sweden's geographical exposure. An AI bust also poses upside risks for EUR/SEK if contagion spreads across European markets, though SEK should be better protected in a US-idiosyncratic event thanks to capital repatriation flows.

EUR/NOK: A year for stabilisation

	Spot	Year ahead bias	4Q26	1Q27	2Q27	3Q27	4Q27
EUR/NOK	10.59	Neutral	10.65	10.70	10.70	10.80	10.75

Cuts to start in 2H27: We think the bar for another Norges Bank hike is fairly high. While Norway had an inflation problem before the Iran war, policy was already restrictive at the start of 2026. Policymakers aren't ruling out another move but have sounded content with the current 4.5% rate and are mindful of overtightening risks. We broadly agree with Norges Bank's latest projections, which see headline and underlying (ATE) inflation falling steadily below 3.0% from 1Q27 and stabilising around 2.3-2.8% in the second half of next year. Restrictive policy even before the energy shock, alongside krone appreciation, limits the risk of further inflation overshooting. Policymakers will be wary of jumping the gun on easing, but a roughly 2% positive real rate will argue for some unwinding of tightening in 2H27. We forecast two 25bp cuts, in 3Q and 4Q, taking rates to 4.0%. Some growth softening should contribute to the dovish shift: we expect 1.2% growth in 2027, with downside risks.

A quieter year for NOK: Markets aren't fully pricing in rate cuts in Norway before 2028, so we expect a dovish repricing to weigh on the krone. At the same time, we doubt Norges Bank will signal a rapid cutting cycle ahead, as inflation will still be above the 2% target in 2027. Incidentally, our view leans on the dovish side of consensus, and the risks are skewed towards a delay in easing plans. In the first half of the year, anyway, NOK will continue to enjoy a very attractive carry. If our call for low volatility materialises, carry should limit the size of any EUR/NOK rally fuelled by lower energy prices. As we see the ECB shift to easing from 4Q27, the front-end rate differential in EUR/NOK should turn only moderately more supportive for the pair. Expectations for lower interest rates in the US too should also make for a broadly supportive environment for the low-liquidity NOK. Finally, NOK's stronger fundamentals relative to the euro argue against large EUR/NOK appreciation.

Geopolitics and equities the main risks: While our baseline is for a quiet year for EUR/NOK, the krone is the least liquid currency in G10, leaving it highly exposed to violent corrections in equities, like those seen in autumn 2026. Geopolitical developments will remain a key source of volatility risk for EUR/NOK. Any re-escalation and prolonged conflict in the Middle East should bring initial benefits to the krone if energy prices find a new, higher floor. But if inflation causes another round of monetary tightening across the globe, expect NOK to underperform, as liquidity conditions drying up and more elevated volatility would nullify the krone's rate advantage. The biggest black swan for NOK downside remains any deterioration in Russia-NATO relations.

EUR/DKK: Moderately stronger for longer

	Spot	Year ahead bias	4Q26	1Q27	2Q27	3Q27	4Q27
EUR/DKK	7.48	Neutral	7.47	7.47	7.47	7.47	7.46

Greater tolerance for EUR/DKK upside: Danmarks Nationalbank (DN) has signalled greater tolerance for EUR/DKK appreciation this year. Between October 2019 and January 2020, before the Covid impact, levels around 7.470-7.475 prompted DKK17.8bn of FX sales to defend the krone. Similar levels have prevailed throughout this year, with peaks above 7.476, yet intervention has been much smaller at DKK6.3bn, spread between June and August. The deviations from the 7.460 peg target remain very small, reaching around 0.22% at the intraday peak in July. Still, the signal points to a partial change in the central bank's tolerance for EUR/DKK upside drifts.

Intervention to remain first line of defence: For some time, we sensed that contained FX intervention might have been a prelude to larger DN rate increases versus the ECB, providing structural support to the krone. Instead, the bar for a rate reaction by DN seems to have been set higher. Incidentally, even the small FX sales seen this year have been enough to take the edge off EUR/DKK, indicating good effectiveness. Denmark's FX reserves have plateaued in USD terms in 2026, but at around $110bn (approximately 22% of GDP), they still provide very large ammunition to protect the DKK peg. We therefore expect FX intervention to remain the first line of defence against EUR/DKK upward volatility. That could be associated with renewed US-Denmark diplomatic clashes over Greenland, although the midterm blow to President Trump has probably reduced that risk.

Upward drift can linger for longer: In our view, the +40bp policy rate differential between the ECB and DN should prevent EUR/DKK from trading back below central peg parity (7.460) next year. Unless DN closes that gap through surprise rate moves, we expect EUR/DKK to remain broadly supported in a 7.465-7.475 range for most of 2027. Ultimately, we feel that a narrower policy rate gap is a realistic longer-term expectation (2028 is our best guess), which should anchor EUR/DKK back to 7.460 more steadily.

USD/CAD: A decent outlook for the loonie

	Spot	Year ahead bias	4Q26	1Q27	2Q27	3Q27	4Q27
USD/CAD	1.42	Bearish	1.41	1.39	1.37	1.35	1.34

BoC to remain cautious: We expect only one more Bank of Canada (BoC) hike, likely in 1Q27, taking the policy rate to 2.75%. We admit there are risks of an additional increase to 3.0%, but for now we view rates at that level as unlikely. Core inflation has remained anchored at 2.0% since the start of the Iran war, despite US tariffs. The risk of second-round effects has increased, as lagged supply chain inflation can start to feed through in early 2027, but some factors should keep these effects relatively contained in our view. Unemployment has edged lower in 2026, but this reflects a further decline in the participation rate rather than employment strength, with net employment modestly contracting. Businesses continue to report muted hiring conditions and no major pickup in expected wage growth, which has incidentally fallen in 2026 according to official data. Trade-related uncertainty is also weighing on sentiment, while growth momentum should slow in the new year, limiting businesses' ability to pass through higher producer prices.

Front-end to favour USD/CAD softening: We expect the Fed to start cutting rates in late 2027, dragging front-end USD rates markedly lower. CAD short-term rates are the most correlated with the US in G10, which often means the loonie lags most other peers during a dovish Fed repricing. Still, BoC expectations are not aggressive, with markets currently embedding another 50bp of tightening over the next year, similar to the USD curve. Crucially, we estimate Fed rates are currently around 75bp above neutral, broadly in line with FOMC dot plot projections. In contrast, the midpoint of BoC staff neutral rate estimates is 2.75%, arguing against any monetary policy easing even if the Fed starts cutting in late 2027. Improved growth in 2027, also thanks to a pick-up in AI-related investment, should also play a role. We expect the USD/CAD 2yr swap rate gap to retighten to pre-war levels, warranting a gradual decline to 1.34 by end-2027.

Trump remains the big risk for CAD: Markets have largely dismissed the escalation in the US-Canada trade spat in 2026, with the negative impact on CAD remaining very contained. The US midterm result may suggest that the widely unpopular trade war with Canada will be shelved, increasing the chance of a comprehensive deal ahead of the yearly United States-Mexico-Canada Agreement (USMCA) review due in July 2027. Our baseline is for a new USMCA deal to be agreed this year, although negotiations may be complicated and potentially involve threats of new US tariffs on Canada. This may make for a bumpy path towards an eventual CAD-positive outcome. Elsewhere, CAD may emerge as a commodity currency of choice should geopolitical or trade risks flare up in Europe or Asia. Conversely, the risk of an AI bust could hit CAD more than its European peers in our view, given the Canadian economy's exposure to US activity.

AUD/USD: RBA cuts to limit upside

	Spot	Year ahead bias	4Q26	1Q27	2Q27	3Q27	4Q27
AUD/USD	0.68	Mildly Bullish	0.69	0.69	0.70	0.70	0.70

RBA to shift to cuts in 2H27: We think the Reserve Bank of Australia (RBA) is done with hikes after having taken the policy rate to 4.85%, the highest in the G10. While policymakers haven't entirely shut the door to further tightening, the bar looks high as growth and housing concerns strengthen the dovish case. Restrictive financial conditions, housing weakness and softer confidence should weigh on domestic demand, while data centre investment is unlikely to provide a sufficient offset. We expect unemployment to reach 4.8-5.0% in 2027 and rise further in 2028. We think that will lead to a shift to easing earlier than most other central banks, with 25bp cuts in both 3Q27 and 4Q27. That would be the start of a substantial easing cycle in our view, leading to a terminal rate of 3.60% by end-2028. While the Australian dollar is likely to start the year with some of the best risk-adjusted carry in the G10, its rate attractiveness should deteriorate throughout the year.

Fundamentals favour stable outlook: We forecast the rate impact to be a modest net-positive for AUD/USD, though. Markets are not pricing in any extra tightening by the RBA, while already factoring in a cut by end-2027. Instead, the USD curve is far more mispriced on the hawkish side, in our view. We expect a roughly +20bp move in the AUD/USD short-term rate differential over the next 12 months, which is consistent with a sustainable return to 0.71 by the end of the year. However, we expect AUD to lag many G10 peers, especially in the second half of the year when RBA cuts will dent its carry attractiveness. We also see Australia's terms of trade moderating lower, in line with our view for lower oil, natural gas and iron ore prices. On the latter, our commodities team forecasts an average of $90-95/t on the back of new supply from West Africa hitting the market.

AI the biggest risk for AUD: The Aussie dollar's main vulnerability is undoubtedly the external risk environment, especially the threat of a tech-led equity selloff. Recent episodes have consistently seen AUD underperform most other G10 currencies, and we expect its high implied yield to keep the Aussie a high-beta currency throughout next year. We therefore see less scope for AUD to benefit from idiosyncratic US asset underperformance, particularly compared with low yielders. The Aussie also remains exposed to any deterioration in China-related sentiment. While our baseline view for China is growth stabilisation, any renewed Sino-America trade tensions or geopolitical risk emerging in Asia could trigger a material proxy-response by AUD.

NZD/USD: Ample room for recovery

	Spot	Year ahead bias	4Q26	1Q27	2Q27	3Q27	4Q27
NZD/USD	0.56	Bullish	0.56	0.57	0.58	0.59	0.60

Two more hikes by RBNZ: The Reserve Bank of New Zealand (RBNZ) surprised with a split-vote hold in October, when markets and consensus were fully aligned for a hike. Half of the committee holds a rather pessimistic view on domestic and international growth prospects and will be wary of overtightening. That view was partly validated by a soft 3Q jobs market report. That said, the inflation picture continues to argue for higher rates, in our view. We see upside risks to the RBNZ's latest inflation projections that show headline inflation gliding back to 2.1% by end-2027. The Bank's projections already embed one hike from the current 2.75% and split chances of another afterwards. Our call is for a hike in December and another in March, reaching a 3.25% terminal rate. The risks are skewed to a later resumption of hikes, but we think a material downward surprise in growth would be required to prevent at least two hikes. Importantly, we don't currently expect any cuts by the RBNZ before 1Q28.

Rate support should improve for NZD: We expect a material decline in USD front-end rates. The Kiwi dollar's swap curve is also more hawkish than our expectations, embedding 3.50% for one year ahead and even another hike two years ahead. At some point in 2027, we think market expectations for the RBNZ will be revised lower and will start to price in a long-term neutral rate around 3.0-3.25%. Still, there should be a material improvement in the short-term rate differential for NZD/USD, which should drive spot back to 0.60 next year, in our estimates. The starting point is incidentally one of short-term undervaluation, with the pair's recent selloff larger than warranted by market fundamentals. NZD would remain a low-yielding alternative to AUD, therefore limiting idiosyncratic strength, but the gap should start closing as we see markets pricing in a substantial RBA rate-cutting cycle from 2H27, while the RBNZ's lower starting point should curb dovish speculation. We expect a return to the 1.15-1.20 range in AUD/NZD.

Double exposure to geopolitics and AI: The Kiwi dollar will remain vulnerable to escalations in the Middle East due to its net-negative exposure to higher energy prices. Any deterioration in China-related sentiment remains another risk, although we'd expect a slightly smaller impact on NZD than AUD, given Australia's higher dependency on Chinese demand. We have a similar assessment with regard to an AI-bust scenario. NZD would be among the worst performers given its high beta to risk sentiment, but AUD may suffer bigger losses as the RBA has further room to cut in an adverse environment. We think the upside risks to our NZD baseline forecast mostly stem from the domestic activity/inflation story in New Zealand proving much stronger than expected, leaving greater room for the RBNZ to tackle elevated inflation with interest rate increases.

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