Currency outlook: US dollar performance could be mixed
Invesco Fixed Income shares its views of currencies around the world
Stronger global growth environments, like the current one, are typically mixed for the US dollar. The US Federal Reserve (Fed) demonstrated at its March meeting that it is not aiming to disrupt financial markets. This backdrop — above-potential growth and a benign Fed — should translate into mixed US dollar performance versus developed market currencies, in the view of Invesco Fixed Income. We believe the US dollar should underperform emerging market currencies broadly.
See below for the Invesco Fixed Income team’s outlook for other key world currencies.
Euro: The euro remains depressed by negative interest rates, quantitative easing (QE) and a strong US dollar. As the European Central Bank (ECB) begins to backtrack on QE and considers tapering, the euro should begin to appreciate, but that is likely to be a second- or third-quarter story, in our view. The new US administration’s attitude toward currency manipulators may see Germany especially pushing back against the ultra-loose monetary stance of the ECB. In general, we believe QE has approached its conclusion and policy adjustments going forward are likely to be skewed toward supporting longer-term euro strength.
Chinese renminbi: We expect the CNY and CNH currencies1 to trade on the stronger side of the 6.80 to 6.99 range in the month ahead. Softening in the US dollar after the March Fed meeting is expected to continue to support the renminbi. Capital flows have stabilized, and we expect foreign reserves to ratchet higher in the coming months. In addition to the valuation effect, tighter controls over corporate overseas investment and measures recently announced to encourage capital inflows should boost reserves, in our view.
Japanese yen: The yen has been on a strengthening trajectory since the start of 2017. A large part of the strengthening can be attributed to external developments (i.e., concerns that US President Donald Trump will underdeliver, worries over European election outcomes, etc.). It appears that the Trump administration is closely watching currency markets and, with the Bank of Japan unlikely to ease anytime soon, we do not see an obvious catalyst for a near-term correction brought about by domestic policy.
British pound sterling: We expect sterling volatility to increase in the coming months as Brexit discussions get underway. These discussions could initially be negative for the currency, as the European Union (EU) adopts a tough negotiating stance. However, other forces could positively impact the currency over the medium term. A Trump administration that fails to deliver could be such a catalyst (making the US dollar weaker), as could a failure of the eurozone to maintain its recent growth momentum (making the euro weaker). A French election outcome that increases the chances of an EU break up would also likely be supportive of sterling.
Canadian dollar: The Canadian dollar was reasonably strong until the first week of March, when the Fed began telegraphing the prospects of a rate hike at its March meeting. The Bank of Canada has appeared to continue to favor a somewhat weaker currency in spite of some strong economic data, including very strong full-time employment reports. Our opinion remains that the Canadian dollar is overvalued, and we favor being short the currency.
Australian dollar: Signs that inflation is moving higher as well as positive data surrounding the current and trade accounts should be positives for the Australian dollar, in our view. With the economy appearing to be doing quite well, we do not expect the Reserve Bank of Australia to lower rates further in the near future. We remain neutral on the Australian dollar.
With contributions from James Ong, Senior Macro Strategist; Brian Schneider, Head of North American Rates; Sean Connery, Portfolio Manager; Scott Case, Portfolio Manager; Ken Hu, CIO Asia Pacific; Yi Hu, Senior Credit Analyst; and Alex Schwiersch, Portfolio Manager.
1 CNY refers to renminbi that is traded onshore in mainland China. CNH refers to renminbi that is traded offshore, mainly through Hong Kong.
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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.