Going into 2017, the market consensus was one of a strong US dollar environment, with the expectation of the US engine firing on all cylinders, with support from fiscal policy, monetary policy and de-regulation. The engine has stuttered, the US dollar has been declining all year and not many US dollar bulls are left. We are taking stock.
Some of the clouds over Europe’s political landscape have disappeared after the French presidential election resulted in a market-friendly outcome. So has the Swiss franc now lost its value as a Eurozone malaise hedge, or are there other reasons to hold the currency?
With global monetary policy tightening, what will smaller central banks do now? Most didn't have a choice but to keep rates low to avoid excessive currency appreciation, and some had to resort to quantitative easing (like Sweden) or currency floors (like Switzerland and the Czech Republic). The Swiss floor gave in under pressure in early 2015, so the big question is now whether the Czech Republic might also depart from its currency floor?
The consensus remains bullish on India even after, or perhaps because of, recent currency reforms. We beg to differ. While Modi’s reform efforts have been impressive, only rivalled by Mexico following the global financial crisis, India still faces significant cyclical headwinds.
Can investors exploit "value" and "interest" signals to guide their foreign currency allocation? The answer to both looks like a decisive yes. These concepts can be used to help guide currency investments. In the wake of the post-Brexit vote sterling slump, they caution us to be nervous about the strong dollar hype.