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The US dollar has strengthened in recent months on expectations of a December rate hike by the Federal Reserve (Fed). We do not expect strengthening to be the longer-term trend, however. Strong global growth, resulting in less accommodative global central bank policies against a backdrop of gradual Fed policy normalization, is likely to drive the US dollar weaker over the longer term.
We expect the USD/RMB exchange rate to trade In a range of 6.5 to 6.7 in a stable US dollar environment and a range of 6.80 to 6.99 if the US dollar strengthens sharply. Officials indicated in China’s 19th Party Congress that currency stability is a near-term policy priority. Therefore, we expect the spot level of the renminbi to move in tandem with the US dollar, but with lower volatility compared to other major currencies. Capital flows have become increasingly two-way compared to previous periods of net outflows, and we expect this dynamic to continue in the near term.
We maintain our forecast for further euro appreciation. Global growth momentum remains positive while inflation is subdued — this will likely continue to support the weak US dollar trend and higher euro valuations. We continue to view pullbacks in the euro as consolidation within a secular trend that’s generally moving higher.
The yen is likely to remain rangebound (¥110–115) against the US dollar over the next quarter, in our view. There appears to be a general market view that US and Japanese central bank monetary policies will continue to diverge and that this will push the USD/JPY exchange rate higher. While a weaker yen would likely raise Japanese inflation closer to the Bank of Japan’s 2% target, it could negatively impact consumption in the process, which would not be welcome. The yen is also trading at depressed levels on a real effective exchange rate basis, so the potential for significant weakness from here appears limited. As such, we maintain our neutral stance on the yen but would view further weakness as limited if the exchange rate moved toward the higher end of the ¥110–115 range.
British pound sterling:
We continue to expect a positive outcome to Brexit discussions, but it could take some time for this to materialize. The coming weeks will be crucial for Prime Minister Theresa May as she tries to persuade her European Union counterparts to start talks on a trade deal. If her efforts are unsuccessful, May is likely to face a challenge for her job. Such uncertainty would be detrimental for the currency, in our view, and would continue to negatively impact both consumer and business sentiment. We remain underweight sterling in the short term.
The Canadian dollar has been on a roller coaster this year, peaking in September just after the second interest rate hike by the Bank of Canada (BOC). We believe the recent slowdown in growth should allow the BOC to be patient in assessing the need to hike rates again, leaving the currency to trade in a fairly tight range through the end of the year.
The Reserve Bank of Australia (RBA) remained on hold in November, keeping the interest rate at 1.50%.1 It was optimistic about business investment but also remained concerned about weak household consumption. Labor data have improved, with the exception of wage inflation. Overall inflation remains stubbornly low as well. Low inflation along with the robust housing market should keep the RBA on hold. With the Australian dollar still relatively expensive amid positive global growth, we remain neutral on the currency.
We maintain our neutral stance on the Indian rupee. Favorable macro fundamentals such as moderate growth, benign inflation, a hawkish central bank and a manageable current account deficit have already caused the rupee to strengthen. Therefore, we believe upside potential remains limited. However, strong fundamentals and a substantial foreign reserve cushion should provide the rupee with some downside protection against external shocks, in our view.
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: Reserve Bank of Australia, Nov. 7, 2017
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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 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 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.
Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions, and there can be no assurance that actual results will not differ materially from expectations.
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.