Ugo Lancioni, portfolio manager of the Neuberger Berman Macro Opportunities FX fund, discusses the currencies to avoid and undervalued opportunities.
British pound – small underweight
We held a neutral stance on the pound in the lead up to the UK General Election. Despite the landslide Conservative victory – with most market participants long sterling – we have shifted to a small underweight. Political uncertainty will likely increase as the UK faces a tight deadline to negotiate a trade deal.
Furthermore, the balance of trade suggests currency weakness is not boosting exports as much as previously expected. UK growth slowed throughout 2019 due to weakness in the manufacturing sector and, most recently, domestic consumption has fallen.
While the Bank of England is unlikely to make a move in either direction until the Brexit situation becomes clearer, we are keeping a close eye on developments. From a big picture perspective, sterling is still undervalued, and job creation and wages are stronger than expected.
Euro – small underweight
We have also assigned a small underweight to the euro. PMIs remain weak, although stabilising, and the US has still not outlined the proposed tariffs on European cars, which could have a significant impact on the eurozone economy. Moreover, the European Central Bank is maintaining a dovish stance, with monetary policy likely to remain accommodative for an extended period.
However, we are mindful of any signs on fiscal stimulus, which would be supportive of growth and tighter monetary policy. Europe still holds a large current account surplus and would benefit from a pick-up in global growth.
Norwegian krone – overweight
The decision to remain overweight the Norwegian Krone was taken in light of attractive valuations, as the currency depreciated throughout 2019. Housing markets have stabilised and, with employment on the increase, this should boost domestic growth. Additionally, oil and gas investments were carried out despite the fall in energy prices.
With forward-looking data suggesting good growth ahead and above-target inflation, Norges Bank will not cut rates anytime soon. If the housing market takes a hit, employment growth slows and risk appetite falls – as a result of trade tensions, slowing growth or a prolonged period of China weakness due to the coronavirus – we will review our allocation.
Japanese yen – overweight
Long yen remains an attractive trade during periods of risk aversion. Japanese growth continues to be strong, supported by ongoing fiscal stimulus, while extremely low unemployment should support inflation.
The recent collapse in global bond yields makes Japanese low yields less discouraging.
However, yield differentials – in nominal and real terms – with the US are still wide, exacerbated by the Bank of Japan's yield curve-targeting policy. A rebound in risk assets, especially if the outbreak of the coronavirus is contained quickly, could lead to further sell-off as hedges are unwound.
US dollar – small underweight
Despite an overvalued US currency, as well as the country’s twin deficit and narrowing growth gap with the rest of the world, market participants remain long the dollar. We retain a small underweight position, as President Donald Trump's impeachment and the upcoming November elections continue to raise US political risk.
The Federal Reserve is likely to stay accommodative and balance sheet expansion is dollar-negative on the margin. Moreover, if sustained, the recent fall in interest rates should weaken the dollar when risk appetite normalises.
We have kept only a small underweight given US economic data is still superior to other economies’ and the growth gap with the rest of the world remains substantial. Short-term yields are also supportive, despite recently narrowing versus the rest of the world.
Swiss franc – underweight
The Swiss franc still appears very overvalued, hence our continued underweight. Policy action by the Swiss National Bank is under-priced and the persistent strength of the currency continues to keep inflation low. The franc is one of the most attractive funding currencies and carry is likely to be in favour in the current low vol market environment.
However, we are mindful of change, as Switzerland benefits from improvements in European growth and Brexit uncertainty helps the franc. Additionally, the Swiss National Bank may be more cautious on intervention in the run-up to a trade deal with the US, as it was included in the currency manipulator report.
Swedish krona – small overweight
We are overweight the Swedish krona but remain cautious. Valuations are attractive, as the krona has discounted too much trade weakness versus the current situation.
Inflation dynamics are also supportive but volatile. With the trade-weighted krona still at multi-year lows, the central bank should be more accepting of some currency strength.
While the Sveriges Riksbank has brought rates back to positive territory, it will exercise caution as long as the European Central Bank is not tightening. The labour market has somewhat weakened and the yield differential against most currencies is still negative.
Australian dollar – small underweight
The Australian dollar is still one of the most overvalued currencies in the G10. Low realised inflation and wage growth will keep the Reserve Bank of Australia dovish.
Additionally, the Chinese slowdown due to the Coronavirus will weigh on Australian exports and domestic growth. Therefore, we have kept a small underweight to the dollar.
Nevertheless, improvements in Asian sentiment, coupled with fiscal stimulus and the Reserve Bank of Australia's rate cuts feeding through to economic activity, could support the Australian currency.
New Zealand dollar – small underweight
We are underweight the New Zealand dollar, which is also overvalued. Despite easy monetary policy, inflation in the country is not improving as much as expected, leading the Reserve Bank of New Zealand to strike a cautious tone. Growth may have peaked, as immigration and construction slow.
In addition, exports to China will likely take a hit due to the outbreak of the coronavirus. With slowing employment and weak wages, fiscal stimulus will not boost growth much in the near term.
Still, the central bank may have completed this easing cycle, following 75bps of cuts last year, and the New Zealand dollar still has one of the highest carry among G10 currencies.
Canadian dollar – small underweight
Economic data in Canada has deteriorated, but from a high level. Wage growth dynamics are uncertain, and the housing market slowdown could cause further instability. As a result, portfolio inflows in 2019 were weak.
While the Canadian dollar remains overvalued, the business outlook is healthy, terms of trade are now supportive, as well as yield differentials.
Moreover, inbound M&A could increase with NAFTA risks cleared. For now, we are maintaining a small underweight to the dollar.
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As developed market central banks look set to embark on another year of accommodation, Ugo Lancioni, portfolio manager of the Neuberger Berman Macro Opportunities FX fund, discusses the currencies to avoid and undervalued opportunities.