Charles Crowson, portfolio manager, RWC Partners
Theme: US dollar
“The dollar may be down, but it’s not out. From just below 103 in March, the DXY dollar index hit a low of 96 in early June. As the dollar fell, so global equities, credit, commodities, and EM currencies rallied – the reflation trade in action.
“If reflation is real, one would expect to see forward inflation expectations (break-evens, CPI, and so on) rising, but this isn’t the case yet. If US fiscal and monetary policy were truly reckless, then gold ought to be shooting up, and it isn’t.
“This suggests two things: (1) The recent liquidity-induced rally was in fact a case of investors re-allocating cash, not necessarily reflation. (2) The dollar shortage has not been fixed. The huge amounts of debt in the financial system create a recurring risk of a short squeeze in the reserve currency. For portfolio protection, the USD has a key role to play.”