Avoid the Brazilian real given political turmoil will leave it unstable.
Avoid hard-commodity exporters (e.g. South Africa, Chile) as they could be hard hit by a decline in real estate and infrastructure spending in China.
Favour high yielders given yields remain depressed in the developed world.
Favour oil-related currencies as they could recover from their recent slippage.
Favour undervalued currencies likely to recover versus the dollar in H2.
Yuan flexibility gone again
"Despite the need for greater flexibility, the yuan is likely to be kept on a tight leash."
Yuan – going nowhere. The new fixing policy introduced in late May will help Chinese authorities stabilise their currency versus the dollar. However, it also ends two years of attempts to make the foreign exchange policy more flexible. It seems political considerations have prevailed, as China launched its 100-day action plan to address trade imbalances with the US. Furthermore, past experience has shown that a weaker yuan only reinforces domestic investors’ eagerness to diversify into foreign currency assets. Recent dollar weakness has facilitated some repletion of currency reserves following the trough in January 2017 (they had fallen by $1trln since summer 2014).
The new fixing policy has also helped the currency basket regain 1% but it remains down 2% year-todate. Given the dollar’s very limited upside potential in coming months, USD/CNY should remain stable. Despite the need for greater exchange rate flexibility and expectations of slower economic activity, policymakers are likely to keep the yuan on a tight leash. As a consequence, we expect USD/CNY to trade around 6.80 in 6 and 12 months.
High yielders still in favour
"With volatility so low, emerging currencies have delivered appealing risk-adjusted returns."
Emerging currencies – yield hunt still on. These last few months, emerging currencies have enjoyed a more benign environment – a) the US dollar has weakened so far this year; b) stronger global trade has helped many emerging economies cut their external deficits; c) developed market investors continue to chase higher returns (in real yield) in the emerging world; and d) appetite for emerging market assets has recovered since 2016 and should persist in coming months.
Market participants still don’t believe the US Federal Reserve’s rate hike forecasts and although most are favouring short maturities on the US bond market, they are open to medium- to long-term maturities in emerging bond markets. With volatility low across asset classes, emerging currencies have delivered appealing risk-adjusted returns and still have upside potential. Of course, investors should bear in mind political risks or the impact of a Chinese slowdown on commodity prices. However, high yielding currencies – in particular those of oil producers – should continue to do well.
Sources: SG Private Banking, Bloomberg. 30/06/2017. Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations, and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest.