Currency outlook: US dollar volatility could become a concern as global central banks remove stimulus

Invesco Fixed Income shares its views on currencies around the world

Currency outlook: US dollar volatility could become a concern as global central banks remove stimulus

Time to read: 2 min

US dollar:

Underweight. We expect the strong global growth environment to drive the US dollar weaker over the long term. Global monetary policy should converge as the US Federal Reserve (Fed) nears the end of its tightening cycle and other major central banks begin to normalize. As this occurs, volatility in the US dollar could become a concern, as the Fed is likely to remain consistent in its tightening path while other central banks navigate the early stages of removing monetary stimulus.

Euro:

Overweight. We continue to expect further euro appreciation due to a broader weakening trend in the US dollar. In our view, the recent consolidation in the euro is complete. We anticipate policy convergence between the European Central Bank (ECB) and the Fed in the coming year as the ECB adopts a gradual tightening stance.

Renminbi:

Neutral. The US dollar/renminbi exchange rate jumped to 6.6 in late June.1 We believe this performance has been driven by the movement of the US dollar, corporate capital flows and deteriorating sentiment, partly led by trade war threats. The belief that China may independently pursue monetary policy easing during the Fed rate hiking cycle likely intensified the downward pressure on the renminbi. In the near term, we expect the US dollar renminbi exchange rate to trade in the range of 6.5 to 6.7.

Japanese yen:

Overweight. We anticipate the trajectory of the yen will be influenced by geopolitical developments in the near term, with additional support likely if there is an escalation in trade war rhetoric. In the long term, the yen is likely to appreciate along with other currencies compared to the US dollar. A change in Japanese monetary policy, such as an adjustment to the Bank of Japan’s policy of yield curve control, is likely to accelerate this appreciation.

British pound sterling:

Neutral. Sterling is likely to be driven by developments in Brexit discussions and expectations for rate hikes. It is unlikely there will be a major breakthrough on Brexit, however, at the June European Union summit. Therefore, the Bank of England may be reluctant to hike rates in August given the uncertain backdrop and because the UK economy is not showing signs of overheating. We are seeking an opportunity to move overweight sterling, given our longer-term expectations of a soft Brexit at worst.

Canadian dollar:

Neutral. The Canadian dollar has been weakening since late April. Difficulties resolving ongoing North American Free Trade Agreement negotiations and weak first quarter growth have weighed on the currency. While oil remains well above where it began the year and growth has shown signs of rebounding, neither have helped the Canadian dollar recently. With wage growth firm, the Bank of Canada appears likely to hike the overnight rate at its meeting in July. The Canadian dollar should start to see some support from current interest rate levels.

Australian dollar:

Neutral. The Reserve Bank of Australia (RBA) held rates steady once again at its June meeting. Its statement was very similar to previous months. The bank continues to expect gradual improvement in employment and wages, and inflation to move towards its target. First-quarter growth was higher than expected as the Australian economy has continued to be relatively strong. However, despite a drop in the unemployment rate, wage growth has remained stubbornly low. The RBA acknowledged that housing credit growth has slowed and that some further tightening in lending standards is expected. This should put downward pressure on housing prices. Based on the RBA’s insistence on patience, as well as stubbornly low wage growth and inflation, it is likely to keep rates steady for some time.

Indian rupee:

Overweight. The rupee has experienced a significant sell-off in recent weeks, largely driven by an increase in crude oil prices, foreign portfolio outflows and investor fears of a higher current account deficit. However, looking ahead, we believe risks to the rupee are tilted to the upside, as we expect the Reserve Bank of India to turn more hawkish with the possibility of another rate hike in August. We see rising oil prices as the main downside risk to this view.

Ray Uy, Head of Macro Research and Currency Portfolio Management; James Ong, Senior Macro Strategist; Noelle Corum, Associate Portfolio Manager; Yi Hu, Senior Analyst; Sean Connery, Portfolio Manager; Brian Schneider, Head of North American Rates Portfolio Management; Scott Case, Portfolio Manager; Amritpal Sidhu, Quantitative Analyst

1 Source: Bloomberg L.P., June 1, 2018 to June 30, 2018

Important information

Blog header image: YUROU GUAN/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 performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.

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.

 

 

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