In 2013, we believe that central bankers in the United States, United Kingdom, Japan and the Eurozone will continue to expand their balance sheets in an effort to lower interest rates and depreciate their currencies (thus making their exports more attractive to foreign buyers). With such implicit pledges in place, investors could consider diversifying into currencies that are historically undervalued and economies that are growing at faster rates than many developed markets. As G3 central banks continue to debase their currencies and lower interest rates through monetary stimulus, investors will continue to search for yield, oftentimes outside their domestic markets.
As we noted in another blog post, the Chinese yuan reached an all-time high exchange rate against the U.S. dollar in mid-November. While buying a currency near its all-time high may make some hesitate, we believe there are deeper structural factors at play that could give rise to a yuan that continues to appreciate against the U.S. dollar. However, with much – growth yet to occur in Asia, most Asian currencies still remain below their historical highs. Taking a look at the currencies in ALD, most countries are, on average, close to 8% below their five-year highs.4
Included in this calculation is the Indian rupee, which has depreciated to all-time lows on the back of inflation, deficit and growth concerns early in 2012. While the war is hardly won, investors could consider investing in the country, which many predict will eventually overtake China as Asia’s growth engine.5 With solid fundamentals and economic expansion, it may be possible for many Asian currencies to break through all-time-high exchange rates against the U.S. dollar in 2013.
Rick Harper is head of fixed income and currency for WisdomTree Asset Management. This post was republished with permission from the WisdomTree blog.
1JPMorgan, International Monetary Fund (IMF), October 2012.
2As measured by gross domestic product (GDP).
3IMF, WisdomTree, November 30, 2012.
4WisdomTree, November 30, 2012.
5Standard Chartered, “The Super-Cycle Report.