Stay up to date on the latest thoughts from our Currency Management Group
Over the last few months markets have priced significant additional policy tightening from global central banks in response to a widespread acceleration in inflation. This phenomenon has been global in nature, catalysed by changes in outlook and policy from smaller central banks but also affecting the largest markets.
Valuation is a key pillar of active currency management, despite the long time horizon required.
The Canadian dollar has appreciated substantially this year and we believe it is now approaching fair value versus the US dollar. While our longer-term models remain overweight, we have begun scaling back exposure.
The decision whether to hedge currency exposure is dependent on three main variables: the investor’s risk appetite; the portfolio composition; and the economic environment. For investors, as with any investment decision, it is important that they understand their ability and their willingness to take risk.
Over the past few quarters our forecast that widening trade deficits would weigh on the US dollar has broadly been correct. The prospects for trade-related flows look set to remain a challenge for the dollar. By contrast, the growth outlook for the US economy is bright.
We believe the rollout of a vaccine is likely to have the greatest influence on financial markets in the first quarter of 2021. Periods of growth recovery are historically associated with a weaker US dollar, particularly vs. cyclical and emerging market currencies (EMFX). With favourable valuations, flows into EMFX could be significant.
The Japanese yen has been a popular currency to own during over the past few months by virtue of its negative correlation with equities.
The increased level of interest rate volatility in the currency swap market has received considerable attention from market participants.
Our long standing view on the pound has been that it is not as cheap as widely perceived despite the fall related to Brexit.
A couple of key trends in capital flows suggest the role of euro funding is growing, and we outline the near-term implications for currency markets.
Since the start of 2013, consensus forecasts for the Swedish krona and Norwegian krone have been persistently bullish and persistently wrong.
With current general election polling consistent with a victory for the Conservative Party, the pound has outperformed over the last few months.
We believe the US dollar is currently experiencing a rare structural change in valuation level that means it may be far less overvalued than is widely believed.
We believe a well-designed, tailored approach to using ESG factors for active currency management can be a source of added value for clients over the long term.
The probability of US unilateral intervention has risen from a tail scenario to one of low-to-moderate probability.
How the dollar trades following the cut in rates, depends to a large extent on whether the rate cuts are mid cycle or recessionary.