We note that the overall framework for the euro has turned negative vs. certain currencies (SEK and yen), based primarily on tactical factors, and is less positive vs. the US dollar than before. Sweden is well into the expansion stage and Norway’s experiencing better economic conditions could pave the way for a monetary policy response. Our valuation framework remains negative for the dollar, while the yen is acting as a ‘safe haven’’ amid rising volatility.
Though rate differentials remain penalizing, the yen – based on our long-term framework – appears attractive. In the current environment of geo-political uncertainty, and with the escalation of North Korea conflict, the yen still remains an attractive safe haven and diversifying asset.
EMFX has rebounded since the beginning of the year, on the back of solid EM growth momentum 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. We currently hold a long EMFX position vs. the US Dollar, with overweights in cheap commodity currencies like the Brazilian real (BRL), Colombian peso (COP), Indonesian rupiah (IDR) and Malaysian ringgit (MYR), on expectations of these currencies outperforming due to their high real yields and relatively strong external positions. We also favour idiosyncratic currencies like the Mexican peso (MXN), based on the lower probability of a disruptive NAFTA deal and credible Banxico policy management (introduction of an FX swap programme and outstanding Fed swap line). Finally, we remain overweight the Thai baht (THB) on strong external balance-sheet dynamics and the Turkish lira (TRY) on its attractive long-term valuation and tight CB monetary policy.
These overweights have been partially offset by a structural underweight in the Chinese yuan (CNH) and tactical underweights in the Colombian peso (COP) and South African rand (ZAR). The Chinese yuan (CNH) is expected to continue depreciating in the medium term due to the liberalization of the capital account and to slower growth. The COP is suffering from weak fundamentals (deteriorating twin balances) and the South African rand (ZAR) has been negatively affected by downgrade risk, deteriorating fundamentals and a weak policy mix of a credible monetary policy and poor fiscal-policy management.