04 JUN

2018

Fixed Income , Topics

Tactically long on USD & NOK

CURRENCY STRATEGY

The overall framework – based on rate differential, carry-to-risk and economic surprises – is negative for the US dollar. Furthermore, with the tariffs that have been implemented by the US administration, the potentially significant measures that are likely to come, and significant twin deficits exhibited by the USD, the greenback remains under pressure vs. major currencies over the medium term. However, we aim to manage the exposure in a tactical manner as the trade remains vulnerable to central bank communication. The Fed now appears to be the only central bank that is in the tightening phase and, as a result, the greenback has appreciated significantly in recent weeks. Moreover, short-term factors remain supportive of the USD (fiscal plan, budget, cash repatriation). In this context, we have a tactical long position on the USD.

As Norges Bank should clear the path for a rate hike in 2018, and as our scoring remains very positive for the currency, we maintained our long position on NOK. Furthermore, the currency is also supported by a relatively strong economy.

Though rate differentials remain penalizing, the Yen – based on our long-term framework – appears attractive. In the current environment of geopolitical uncertainty and the heavy dose of event risk present, the Yen remains an attractive safe haven and a diversifying asset.

 

Emerging currencies: Near-term OW currencies of commodity exporters, Maintain a constructive medium-term stance

Over the course of the month, we added back some exposure to commodity currencies with attractive valuations and stable growth dynamics (BRL, COP, IDR, UYU) and covered the underweight (UW) in CNH on uncertainty related to the impact of the introduction of US tariffs on the Chinese Yuan.

Overall, we hold a tactical overweight (OW) position in EMFX of commodity exporters (BRL, PEN, COP) on the expectation that commodity FX will outperform in a year of global growth recovery and trade closer in line with longer-term fundamentals, which are still indicating EMFX undervaluation. We also hold an overweightin IDR and UYU on good carry-to-volatility and on the improvement in terms of trade.

We have adopted an underweight position in select Asia FX (MYR, THB) based on unattractive EMFX scores and valuations, trade protectionist risks, low carry and growth risks.