26 APR


Fixed Income , Topics

Still favouring JPY as a macro hedge

Currency strategy

The overall framework – based on rate differential, carry-to-risk and economic surprises – is negative for the US dollar. Furthermore, with the tariffs that have been implemented by the US administration, the potentially significant measures that are likely to come, and the constant protectionist rhetoric from the White House, the greenback remains under pressure vs. major currencies. However, we aim to manage the exposure in a tactical manner, as the trade remains vulnerable to Fed communications, especially with the uncertainty surrounding the Federal Reserve. Indeed a new hawkish Fed governor could initiate a re-pricing of market expectations and temporarily support the US Dollar, for which, moreover, short-term factors (fiscal plan, budget, cash repatriation) remain supportive.  

As Norges Bank should clear the path for a rate hike in 2018, and as our scoring remains very positive for the currency, we have maintained our long position on the NOK.

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.

Emerging currencies: Near-term OW currencies of commodity exporters; Maintenance of a constructive medium-term stance

Over the course of the month, we added back some exposure to commodity currencies with attractive valuations and stable growth dynamics (BRL, COP, IDR, UYU) and covered the underweight (UW) in CNH on the uncertainty related to the impact of the introduction of US tariffs on the Chinese Yuan.

Overall, we hold a tactical overweight (OW) position in commodity exporter EMFX (BRL, PEN, CLP, COP) on expectations that commodity FX will outperform in a year of global growth recovery and trade closer in line with longer-term fundamentals, which are still pointing to EMFX undervaluation.  We also hold an overweightin IDR and UYU on good carry-to-volatility and the improvement in terms of trade.

We have adopted an underweight position in Asia FX (CNH, INR, MYR, THB) based on unattractive EMFX scores and valuations, trade protectionist risks, low carry and growth risks.