While tariffs remain a concern, the key issue is the degree—which we deem moderate—of U.S. recession risk. The current global backdrop makes the U.S. dollar unlikely to strengthen. Earnings growth expectations are modest, valuations are undemanding, and expected returns are above average.
Our view over the past few quarters has been that EURUSD should be rangebound, as the cyclical outperformance of the US economy is offset by the eurozone’s relatively better balance of payments position.
Since the end of March this year, market sentiment towards the Chinese currency has shifted significantly, coinciding with the steady divergence in cyclical positions and the escalating trade dispute between US and China. The renminbi’s underperformance against its major trade partners has been seen by investors as a natural adjustment mechanism, reflecting the People’s Bank of China’s (PBOC’s) more accommodative stance in response to economic stresses. However, the PBOC’s policy reaction function when faced with a USD/CNY parity breaching above 7.0 remains subject to uncertainty.
‘Implications from our 2018 Long-term Capital Market Assumptions’, ‘Matching cash flows and managing liquidity in maturing pension funds’, ‘Private credit: Time to consider special situations?’ and ‘Alternative risk premia in defined contribution (DC) plans’.