With the dollar – marred by weak data coming out of the US and the Federal Reserve’s cautious approach – continuing to weaken, the Euro appears to be the currency of choice for foreign investors. With acceleration in the activity cycle, better macro-economic indicators and a central bank that looks set to taper its QE, the long Euro trade appears to have legs, in spite of the recent strong performance. Elsewhere, the Canadian dollar also holds a positive score, on the back of an improving activity cycle and a central bank that has turned more hawkish recently.
Though rate differentials remain penalizing, the Yen – based on our long-term framework – appears attractive. In the current environment of geopolitical uncertainty and the heavy dose of event risk present, the Yen remains an attractive safe haven and a diversifying asset.
EMFX has rebounded since the beginning of the year on the back of solid EM growth momentum and the more synchronized global growth extending to the Eurozone and Japan. We expect this trend to continue, notwithstanding some volatility around monetary-policy normalization and balance-sheet unwinds in core markets like the US and the Eurozone. We hold a long EMFX position vs. the US Dollar, with overweights in cheap commodity currencies like the Russian Ruble (RUB), the Peruvian Sol (PEN), the Indonesian Rupiah (IDR) and the Malaysian Ringgit (MYR), on expectations that these currencies will outperform due to their high real yields and relatively strong external positions. We continue to be overweight the Thai Baht (THB) on strong external balance-sheet dynamics and the Turkish Lira (TRY) on attractive long-term valuation grounds and tight CB monetary policy.
These overweights are partially offset by a structural underweight in the Chinese Yuan (CNH) and tactical underweights in the Philippine Peso (PHP). The CNH is expected to continue depreciating in the medium term due to the liberalization of its capital account and slower growth. The PHP is also suffering from fast-deteriorating external accounts.