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We expect the US dollar to continue to depreciate due to ongoing global economic growth and converging central bank policies. We have revised our 2018 US Federal Reserve rate hike call from two to three, in line with US bond pricing. While recent inflation strength has raised the possibility of four rate hikes, we believe that is unlikely without significant wage pressures. Globally, the growth trend is expected to be stronger relative to the US, meaning non-US central banks should shift away from their accommodative stances, especially the Bank of Japan (BOJ) and the European Central Bank. There may be a demand shift away from US investments as growth outperforms elsewhere. Such a development could also weigh on the US dollar.
The euro is likely to continue appreciating, in our view. We believe we are in the nascent stages of a global inflation regime shift, transitioning from a world of disinflationary risk to one that is more balanced. We believe the resulting policy changes will support a weaker US dollar and continue to view pullbacks in the euro as consolidation within a longer-term trend higher.
The USD/RMB exchange rate has appreciated since the beginning of 20181 as a result of a weaker US dollar, the conversion of US dollars into local currency by Chinese companies and macro fund trading activities. The move has been consistent with other currencies against the US dollar. Following the renewal of the $50,000 foreign exchange conversion quota in January, the continued strength of the renminbi suggests that companies and households had over-accumulated US dollars in recent years. China’s policy makers have already started to loosen regulations to allow more capital outflows, and if the renminbi strengthens further, we expect more outflow channels to be opened.
The yen started out strong in 2018 due to increased expectations of tighter BOJ monetary policy, repatriation flows and general US dollar weakness. A strong yen should have a dampening effect on Japanese inflation, which will likely not be welcomed by policy officials and could make achieving the BOJ’s 2%2 inflation target more difficult. We have already seen government officials verbally intervene to dampen further yen appreciation, and we expect those efforts to intensify. However, we remain positive on the yen over the longer term given our bearish view on the US dollar.
British pound sterling:
We continue to look for opportunities to move overweight sterling. The currency is likely to be volatile in the coming months as talks get underway concerning the future of trade and a transition deal with the European Union (EU). We believe the UK will either agree on a soft Brexit or decide to remain in the EU. With the economy unlikely to collapse regardless of the outcome, we continue to look for attractive entry points for sterling. We expect these to come about if Brexit discussions become contentious.
We are currently neutral on the Canadian dollar. After rallying sharply at the beginning of the year, it has since lost all of its gains and then some. Economic data at the end of January disappointed as the Canada Consumer Price Index remained low. That, combined with the increase in Canada’s trade deficit, probably weakened the currency. In addition, oil prices have fallen from the highs in January.
With the Reserve Bank of Australia (RBA) holding rates steady as expected at its February meeting, we remain neutral on the Australian dollar. The RBA continues to forecast a gradual improvement in the economy, with inflation reaching its target range of 2% to 3% sometime in 2019.3 However, the RBA remains concerned about the lack of wage inflation and weak consumer spending and reiterated its commitment to remain patient with interest rates.
We are neutral on the Indian rupee. Going forward, we see downside risks to the currency from higher-than-expected inflation, higher oil prices and an increasing current account deficit. On the other hand, strong foreign direct investment inflows, sizable foreign exchange reserves and an improving growth outlook will likely continue to support the rupee at current levels.
Ray Uy, Head of Macro Research and Currency Portfolio Management; James Ong, Senior Macro Strategist; Yi Hu, Senior Analyst; Sean Connery, Portfolio Manager; Brian Schneider, Head of North American Rates Portfolio Management; Alex Schwiersch, Portfolio Manager; Scott Case, Portfolio Manager; Amritpal Sidhu, Quantitative Analyst
1 Source: Bloomberg L.P., data from Jan. 1, 2018 through Feb. 28, 2018
2 Source: Bank of Japan, Feb. 21, 2017
3 Source: Reserve Bank of Australia, Feb. 21, 2017
Blog header image: Peter Cho/Shutterstock.com
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.
The Consumer Price Index (CPI) measures change in consumer prices. In Canada, this is calculated by Statistics Canada.
A trade deficit is an economic measure of international trade in which a country’s imports exceed its exports. Therefore, a trade deficit represents an outflow of domestic currency to foreign markets.
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.