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CURRENCY EXCHANGE RATE ASSUMPTIONS

IN BRIEF

  • U.S. fiscal stimulus has improved economic activity, corporate earnings and consumer sentiment, producing a divergence between the cyclical position of the U.S. and those of other countries — and abetted the Federal Reserve’s policy rate normalization — a dynamic that has halted what had been an aggressive unwinding of the overvalued U.S. dollar.
  • For most currency pairs, we expect this U.S. dollar reversal will produce only a transient impact, likely to subside as the effects of the fiscal impulse from the U.S. tax reform begin to wear off toward the end of 2019.
  • We assume some recovery of pound sterling over our assumption horizon, although the currency has remained impaired given the political and economic costs of Brexit -- though, at the time of writing, it is unclear what form Brexit may take, so the uncertainty around our sterling assumption is high.

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After a broad-based U.S. dollar reversal over the last year, our assumptions point toward significant future weakness

ASSUMPTIONS FOR SELECTED CURRENCY EXCHANGE RATES — NEXT 10–15 YEARS

(According to market convention, CURRENCY A/CURRENCY B means one unit of CURRENCY A is worth the stated number of units of CURRENCY B. EUR/USD = 1.30 means EUR 1.00 is worth USD 1.30.)

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Source: Bloomberg, J.P. Morgan Asset Management; estimates as of September 30, 2018.
*For consistency and ease of conversion, we have assumed that the forecast horizon for the per annum change in percentage terms is 12.5 years. Differing from market convention, we have also used a uniform signing convention, such that a positive figure represents a strengthening of the currency vs. the U.S. dollar, and vice versa.

 

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2019 Long-Term Capital Market Assumptions

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