Why currency volatility could be the market's 'Achilles heel' in 2025

Investors might be underplaying the risk to the bullish market rally from erratic movements in the foreign exchange arena.

 

KKR stated in its 2025 forecast this week that currency fluctuations will transform into the market's "Achilles' heel" in the following year.

 

"In essence, this isn't the right moment to assume excessive exposure risk in forex, as it could become the key narrative of 2025," it indicated.

 

The organization advised investors to prepare for trade conflicts and expanding fiscal imbalances that could intensify foreign exchange volatility beyond recent standards.

 

Trade tariffs are likely to disrupt global interest rate synchronization, while economic quarrels create additional disturbances. Monetary policies play a role in determining currency rates, and significant shifts can cause instabilities.

 

Concurrently, massive levels of government debt can reduce demand for a nation's currency, leading to depreciation.

 

KKR recommends investors reflect on market behavior between 1994 and 2000. Following the initial interest rate hikes that jolted markets in 1994, the stock market proceeded to surge, much like the trend since 2022, KKR observed.

 

"Nevertheless, instability arose in 1998, as a mix of currency unwinding and over-leverage resulted in a swift and intense market correction that investors underestimated," the outlook highlighted.

 

Investors can witness similar occurrences emerging in certain markets.

 

This week, debt and equity markets in Brazil experienced turmoil amid a substantial decline in the nation's real. The currency has become the worst performing one against the dollar, reaching an all-time low on Wednesday.

 

Since late November, Brazilians have been selling off the real following unsuccessful austerity proposals to reassure investors worried about the country's growing fiscal deficit.

 

Nevertheless, KKR remains largely positive about 2025. The firm anticipates the S&P reaching 6,850 by the end of the year, before advancing toward 7,500 in 2026.

 

"Without a doubt, we expect ample volatility, consolidations, and setbacks on the path to our 2025-26 price objectives," KKR expressed, advising that investors combine mega-cap tech exposure with cyclicals and small to mid-size cap stocks.