Currency outlook: ECB policy direction supports longer-term euro strength

Invesco Fixed Income shares its views of currencies around the world

Currency outlook: ECB policy direction supports longer-term euro strength
Share on FacebookTweet about this on TwitterShare on LinkedInEmail this to someonePrint this page

US dollar:

Our strong global growth view continues to indicate a mixed environment for the US dollar. Downside surprises in US inflation may cause the US Federal Reserve (Fed) to delay raising rates later this year. In addition, major global central banks like the European Central Bank (ECB) have more significant moves to make in terms of normalizing their policies. Global policy normalization may favor currencies of countries whose central banks are scaling back their QE programs — for example, the euro versus the US dollar.

Euro:

We remain optimistic on the prospects for further euro appreciation. In our view, European fundamentals continue to point toward a stronger euro. In general, we believe that the US dollar cycle has reached its zenith, driven by global growth convergence, and that ECB policy adjustments going forward are likely to be skewed toward supporting longer-term euro strength as political risks recede.

Renminbi:

We now expect the CNY (onshore) and CNH (offshore) currencies may likely trade on the stronger side of the 6.80-6.99 range in the coming weeks. The direction of the CNY/US dollar exchange rate within this range will likely be subject to US dollar strength, but softening in the US dollar is expected to provide support. We don’t think the new “counter-cyclical” factor for CNY pricing versus the US dollar, introduced at the end of May, is a game changer. The new method may have increased the discretionary element in the exchange fixing, but we believe it was prompted by Chinese authorities’ desire for a smoother movement of the currency.

Japanese yen:

The yen continues to trade in a relatively tight range of 110-115 against the US dollar, and we expect this range to hold in the near term.1 Non-domestic events are likely to have more influence on the yen in the next few months, with improved US economic data and Fed rate hike expectations providing the most likely catalysts for a higher US dollar/yen exchange rate. An escalation of geopolitical events would likely limit any yen weakness, since the yen is typically viewed as a safe haven.

British pound sterling:

We have a positive view on sterling over the longer term, based upon a more optimistic outlook for Brexit discussions, valuations and investor positioning. That said, the currency could struggle in the near term given uncertainty over the sustainability of the new UK government. Jeremy Corbyn of the Labour Party is waiting in the wings to take over should the new coalition not survive. However, investors would not likely view his appointment positively, given the spending pledges he made during the recent election campaign. Brexit negotiations could also prove to be a headwind to sterling as preliminary discussions will likely prove challenging.

Canadian dollar:

The Canadian dollar has been in a slow decline over the last year, but has shown some strength recently. As growth rebounded in the first quarter, the Bank of Canada (BOC) appears to be rethinking its level of caution regarding the economic outlook. Oil prices appear to have peaked for the year due to US oil production, presenting a headwind for the currency. We remain underweight the Canadian dollar due to the overleveraged Canadian consumer and our expectation that oil prices have peaked, but we are monitoring BOC rhetoric closely.

Australian dollar:

The Reserve Bank of Australia (RBA) held its benchmark interest rate steady at 1.50%, as expected, at its June 6 meeting. The statement was generally upbeat but conceded that first quarter growth would be weak. The RBA continues to be concerned with the housing market, and this issue, combined with stubbornly low inflation, should keep tightening on hold. The target rate will likely remain at 1.50% for the foreseeable future. We remain neutral on the Australian dollar.

Ray Uy, Head of Macro Research and Currency Portfolio Management; James Ong, Senior Macro Strategist; Noelle Corum, Macro Analyst; Brian Schneider, Head of North American Rates; Scott Case, Portfolio Manager; Sean Connery, Portfolio Manager; Ken Hu, CIO Asia Pacific; Yi Hu, Senior Credit Analyst; Alex Schwiersch, Portfolio Manager

1 Source: Bloomberg L.P., June 20, 2017

Important information

Blog header image: Angel Soler Gollonet/Shutterstock.com

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

The dollar value of foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded.

Ray Uy, CFA

Head of Macro Research and Currency Portfolio Management

Raymund Uy is Head of Macro Research and Currency Portfolio Management for Invesco Fixed Income.

Mr. Uy has been in the industry since 1993. He has experience in a variety of functions, including global fixed income trading and portfolio management; currency trading and portfolio management; credit research and macroeconomic analysis.

Mr. Uy worked at Hartford Investment Management (HIMCO) for eight years prior to joining Invesco in 2012. At HIMCO, he was a lead portfolio manager for non-US-dollar-based fixed income portfolios, and as head of Fixed Income Trading, he managed a centralized platform of traders across multiple fixed income sectors. Before joining HIMCO, Mr. Uy spent six years at Mackay Shields in New York and five years at Fiduciary Trust.

He earned a BBA from Hofstra University in New York, and is a CFA charterholder.

Tags:
More in Feature, Fixed Income
India’s GST bill rollout
India’s GST bill rollout: Structural benefits in the offing

On July 1, 2017, India ushered in its largest-ever indirect tax reform — the rollout of the Goods and Services Tax (GST) bill. The GST...

Close