We hold an underweight position on the USD, based on the negative framework and expensiveness of the currency. Our cautious stance on the greenback vs the EUR is also driven by inflation dynamics and business cycle that argue for an improving euro. Additionally, there are political issues faced by the new administration in the US. Furthermore, the probable reduction of the Fed’s balance sheet later this year would come at a time when the ECB is likely to be hawkish as well, thereby removing some support for the greenback vs. the EUR.
Although rate differentials remain penalizing, the JPY appears to be attractive based on our long term framework. In the current environment of geo-political uncertainty and the heavy dose of event risk present, the JPY still remains an attractive safehaven and diversifying asset.
EMFX has rallied since the beginning of the year on the back of accelerating EM growth recovery and expectations for a reflationary US policy bias. We expect this trend to continue notwithstanding some uncertainty around Fed Funds hikes. We hold a long EMFX position vs. the USD, with overweights (OW) in commodity currencies (BRL, CLP, IDR, MYR), which will outperform the broader EMFX universe on expectations of high real yields and strong external positions. We continue to hold an overweight in MXN (currency posts attractive long-term valuation, with a lower probability of a disruptive NAFTA deal, and credible Banxixo policy management). We also have OW positions on the Turkish lira (attractive long term valuations and tight central bank policies) and the THB (strong external balance).
We are maintaining a structural underweight in the CNH, which is expected to continue depreciating in the medium-term due to the liberalization of its capital account and slower growth.