The growth differential between the US and the Eurozone, as well as a more favourable current-account deficit, clearly mandate for an overweight on the single currency versus the greenback and we estimate the fair-value EUR vs. USD to be at 1.25. Furthermore, with the US and UK exhibiting protectionist and “inward-looking” behaviour, with increasing levels of political risk, investors appear to be turning to the Eurozone as the more stable and attractive region and hence favouring the Euro as the currency of choice. The Macron-Merkel alliance appears to inspire greater confidence than the Trump and May administrations. Indeed, investor positioning has sharply turned in favour of the Euro over the past few months and this is likely to continue. This context should also encourage Eurozone investors to retain the Euro as the funding currency of choice, particularly when investing in the Credit and EM debt markets.
Emerging currencies: Constructive in the medium term
We remain constructive EMFX over the medium term, although we expect higher volatility into year-end. EMFX has rebounded in 2017 on solid EM growth momentum, attractive long-term valuations and more synchronized global growth extending to the Eurozone and Japan. We expect this trend to continue, notwithstanding some volatility around monetary-policy normalization and balance-sheet unwinds in core markets like the US and the Eurozone. However, we are once again exercising selectiveness as we maintain a medium-term positive view on commodity FX such as the Brazilian Real, Malaysian Ringgit and Russian Rouble, based on the expectation that these higher-yielding currencies will outperform due to their high real yields and relatively strong external positions. This is partially offset by a structural underweight in the Chinese Yuan (CNH), which is expected to continue depreciating in the medium term due to the liberalization of its capital account and slower growth.