The overall framework – based on rate differentials, carry-to-risk and economic surprises – is negative for the US dollar. However, we aim to manage the exposure tactically, as the trade remains vulnerable to central bank communications, especially with the uncertainty surrounding the Federal Reserve. Indeed, a new hawkish Fed governor could initiate a re-pricing of market expectations and temporarily support the US Dollar. Moreover, short-term factors (fiscal plan, budget, cash repatriation) remain supportive of the greenback.
As Norges Bank should open the way for a rate hike in 2018, and as our scoring remains very positive on that currency, we have maintained our long position on the NOK.
Though rate differentials remain penalizing, the Yen – based on our long-term framework – appears attractive. In the current environment of geopolitical uncertainty and the heavy dose of event risk present, the Yen remains an attractive safe haven and a diversifying asset.
We scaled down exposure to EM currencies tactically in February although we retain a constructive medium-term view on commodity-exporter currencies. In early March, we added back some exposure to these currencies, whose attractive valuations and stable growth dynamics are in line with our constructive medium-term view on EMFX in general.
Overall, we hold a tactical overweight position in EMFX of commodity exporters (BRL, PEN and RUB) on expectations of commodity FX outperforming in a year of global growth recovery. We also hold an overweightin IDR on its good carry-to-volatility and improvement in terms of trade. Lastly, we have adopted an overweight postion in ZAR, on expected supportive portfolio flows and an MT repricing of the regime change.
We have adopted an underweight position in Asia FX (CNH, INR, MYR, THB), based on unattractive EMFX scores and valuations, trade protectionist risks and low carry and growth risks.