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Neutral. We expect dollar weakness over the long term as global monetary policy converges toward the current US path and the Fed grows cautious due to softening inflation. As such, it is likely that investors will look for better investment opportunities elsewhere, with the resulting flows out of the US weighing on the dollar. In this environment, we would consider shorting US dollars. In the near term, however, we have moved to neutral as global growth has waned slightly and US growth remains supported by fiscal stimulus.
Neutral. Due to the broader US trend noted above, we continue to expect further appreciation in the euro. In our opinion, pullbacks in the euro should be viewed as consolidation within a longer-term trend higher. However, until there is more clarity on the political situation in the European periphery we are neutral, despite the euro’s current valuation.
Neutral. The USD/RMB exchange rate traded in a range of 6.3 to 6.4 for most of May,1 and we believe its performance will continue to be driven by the movement of the US dollar and, to a lesser extent, by corporate capital flows. With the trade friction between the US and China reduced for now, policy uncertainty related to the exchange rate has eased. European data releases and market risk sentiment are likely to have more influence on US dollar strength (and the performance of the renminbi) going forward. In the near term, we continue to expect the USD/RMB exchange rate to trade in the range of 6.3 to 6.5.
Neutral. The global backdrop of above-trend growth and low inflation is likely to make the central bank reluctant to aggressively tighten monetary policy. Macro risks are centered on geopolitical developments (US-China trade tensions, the US-North Korea relationship, Brexit discussions, US-Europe tariffs and the Iran nuclear deal, to name a few). An unexpected outcome to any of these could lead to a flight to quality, which has historically benefited the yen.
British pound sterling:
Neutral. The tone of ongoing Brexit negotiations is likely to dictate sentiment as we approach the June EU summit. There is potential for both internal politics within the Conservative party and external politics, such as discussions with EU members, to negatively impact sterling in the run-up to this event. In the meantime, the UK economy continues to underperform on a relative basis. However, as the Brexit picture becomes clearer (our base case is for a soft-Brexit at worst), we expect sterling to appreciate.
Neutral. Recently, the Canadian dollar has been largely disconnected from the price of oil. While oil has been in a consistent uptrend this year, the Canadian dollar has been generally weaker versus the US dollar. The economic data have been mixed — employment data have softened while inflation and wages are showing improvement. The Bank of Canada left the overnight target rate unchanged in May, but appears set to continue gradually increasing rates going forward.
Neutral. The Reserve Bank of Australia (RBA) held rates steady at its May meeting, with its statement having very few changes from previous months. According to its quarterly Statement on Monetary Policy, the RBA continues to expect above-trend economic growth and gradual improvement in inflation and wage growth. It remains concerned with consumer spending but much less so than previous statements suggested. The latest budget features increased government spending and tax cuts, which should boost the economy. The RBA continues to stress “patience” in its statements and will likely leave rates unchanged for the foreseeable future.
Neutral. The rupee has experienced a significant sell-off in recent weeks. In our view, this has been largely driven by the increase in crude oil prices, foreign portfolio outflows and investor fears of a higher current account deficit. Although the country’s growth outlook remain favorable, the outlook for the rupee remains uncertain. We believe risks are tilted to the downside due to US dollar appreciation, rising crude oil prices and a widening current account deficit.
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; Scott Case, Portfolio Manager; Amritpal Sidhu, Quantitative Analyst
1 Source: Bloomberg L.P., May 1, 2018 to May 28, 2018.
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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.