Here is a look at the global currency outlook to give you a better idea of what to expect from your investments.
A Look at the Global Currency Outlook
US Dollar: Underweight. The US is in the later stage of its economic cycle relative to the rest of the world, in our view. We expect the Federal Reserve to grow cautious while other central banks continue tightening. The dollar should be pressured weaker as investors look for better growth and return opportunities elsewhere.
However, the fundamental picture has been muddied recently, with growth data disappointing relative to expectations — resulting in a mixed performance for the US dollar. We believe this is a short-term correction in market expectations for both US and global growth. We are watching the data closely to be sure that constructive fundamentals are still intact and this is not the start of a downward trend.
Euro:Overweight. We continue to expect further appreciation due to broader US dollar trends, and also see the eurozone trade surplus as supporting a higher euro. We continue to view pullbacks in the euro as consolidation within a longer-term trend higher.
Renminbi: Neutral. The USD/RMB exchange rate hovered around 6.3 in April1 and we believe its performance will continue to be driven by the depreciation of the US dollar. Potential trade friction with the US may complicate the currency’s outlook.
If China’s trade surplus narrows, it could put downward pressure on the renminbi. On the other hand, if a global risk-off event causes a sharp rise in the yen or euro against the US dollar, the renminbi will likely face appreciation pressure. A sharp weakening in the US dollar would probably cause the USD/RMB exchange rate to settle at about 6.2. However, in the near term, we expect it to trade in its current range of 6.3 to 6.5.1
Japanese yen: Underweight versus the Australian dollar. With Japan’s fiscal year-end behind us, we expect Japanese domestic investors to seek higher-yielding foreign assets in the period ahead. In addition, the global backdrop of above-potential growth and low inflation is likely to provide for a risk-on trading environment. The long AUD/JPY trade typically performs well in this environment, since the Australian dollar tends to appreciate while the Japanese yen tends to depreciate.
Concerns over a potential trade war and the situation in Syria are the key risks to our view. An escalation in either would likely support the yen. We continue to keep a close eye on the land sale scandal in Japan that threatens to bring down senior members of the Japanese government. This could also have a destabilizing effect on the currency.
British pound sterling: Neutral. Sterling has recently benefited from the news that the UK government has reached an agreement with the European Union on a post-Brexit transition deal. However, several issues still need to be resolved — such as the Northern Ireland border issue — before any agreement is signed and implemented.
Therefore, we would caution against expecting the pound sterling to move meaningfully higher from current levels. The parties are entering a key period in negotiations and anything that suggests an increased potential for a hard Brexit could hurt sterling.
Canadian dollar: Neutral. The Canadian dollar has recovered after a rough February and March. The risk-off market tone that affected the currency late in the first quarter has given way to positive expectations that the North American Free Trade Agreement (NAFTA) negotiations may soon be finalized.
Removal of uncertainty around NAFTA should be a positive for the currency. In addition, oil has strengthened recently on the back of tensions with Syria and Russia, providing another positive catalyst for the currency.
Australian dollar: Neutral. The Reserve Bank of Australia (RBA) held rates steady again at its April meeting. The RBA stated that it expects gradually improving conditions and is committed to remaining patient with economic policy.
It did, however, express concern about the tightening of conditions in US dollar money markets and sees higher short-term rates flowing through to other countries, including Australia. Australia’s trade surplus has narrowed recently due to an increase in imports, while exports have remained stable, despite the current decline in commodity prices. With inflation and wage growth still below desired levels, the RBA is likely to remain on hold for the foreseeable future.
Indian rupee: Neutral. Recent weakness in the rupee was largely driven by equity outflows in February after a new long-term capital gains tax was introduced into the 2018 budget. More recent macro data, however, show a pickup in industrial production and overall growth, which we believe will support the rupee. Higher crude oil prices and a growing current account deficit remain the primary downside risks to our view.
This article has been republished with permission from Invesco Powershares.