FX opportunities remain despite spotlight on stocks and bonds

Thought of the day

by Chief Investment Office 17 Sep 2019

Currency trading volumes have climbed to a record high of USD 6.6trn a day, according to a triennial survey by the Bank for International Settlements. With the US-China trade conflict adding to uncertainty over the performance of stocks, and around USD 17trn worth of bonds offering negative yields, investors could benefit from paying more attention to opportunities in foreign exchange (FX).

In our FX strategy, we currently favor three main currency ideas:

  • We are overweight the British pound versus the US dollar. While we do not seek to predict the ultimate outcome of the Brexit process, we have taken the view that the FX market has been overpricing the risk of a no-deal Brexit at the end of October. We believe that strong opposition to such an outcome in the UK Parliament is likely to lead to a delay. Recently, this view has been supported by political developments, with UK lawmakers voting for legislation to force Prime Minister Boris Johnson to request a postponement from the EU if he fails to negotiate an agreement. If our base case for an extension to the 31 October deadline proves correct we expect further upside for sterling.
  • We are overweight the Norwegian krone versus the euro and Canadian dollar. With Norwegian inflation outpacing the Norges Bank’s target and economic growth above trend, the central bank could hike rates again this year. This stands in contrast to the Eurozone, with the European Central Bank (ECB) announcing further stimulus this month. We are also cautious on the outlook for the Canadian dollar, given the continued weakness of the nation’s housing market and our expectations that the Bank of Canada will adopt a more dovish stance.
  • With central banks back in easing mode, higher-yielding currencies look increasingly attractive. We own a basket of high-yielding emerging market currencies against a basket of lower-yielding currencies. We overweight the Indonesian rupiah and the Indian rupee, relative to the lower-yielding Australian and Taiwanese dollars.
    So while we see equities and bonds as the mainstay of most portfolios, FX markets have the potential to offer attractive returns for tactical investors.

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