Billions could leave US assets as dollar optimism wanes – Forex Trader Hub
Institutional investors could soon pull billions from dollar-denominated assets as optimism for such bullish bets fades and other developed market currencies look set to appreciate against the greenback in the coming months, attendees at the 11th annual FX Invest North America conference heard.
The comments came after US banking giants JP Morgan and Goldman Sachs flipped their previously bullish dollar views to a bearish take as doubts about the efficacy of President Donald Trump’s promised fiscal stimulus measures grow.
On top of this domestic background, Ulf Lindahl, chief executive officer and chief Investment officer at AG Bisset Associates, noted the start of a new economic cycle will also put downward pressure on the greenback and could spur gains of up to 65% in the euro as a result.
“In the big scheme of things we had enormous [currency] cycles and we have had three cycles that are approximately 15 years long that have just ended, and we are starting a new cycle… [Historically,] a 39% decline on aggregate in the US dollar happens in the first three years when the cycle turns, and the cycle is about to turn right now. We believe that will mean the euro will go up about 65%, so there is plenty of risk and collateral damage that will come out of this,” said Lindahl.
Lindahl, one of four people speaking on an investment round-up panel, hinted that investors are now faced with a tough choice concerning their asset allocation.
‘Decision of all decisions’
“When we advise pension funds and all the large institutions to make strategic decisions, they now have the decision of all decisions to make. If this fourth cycle unfolds and we see the dollar weak for the next seven years, that means they have to make some very, very dramatic asset allocation shifts out of the US and into foreign markets, and foreigners need to move out of the US and into their markets, and these will be large movements that will happen,” he said.
Assume now that we are right and we see currencies go up by 50% on average over the next few years… you’ve got billions and billions that will be changing positions in the currency market
Ulf Lindahl, AG Bisset Associates
“We also have collateral damage like, for example, a US pension fund that has $20 billion invested in [international] equities; they hedge half of that all the time to reduce the volatility. But assume now that we are right and we see currencies go up by 50% on average over the next few years… you’ve got billions and billions that will be changing positions in the currency market,” Lindahl added. “Basically, they will have to close those hedges.”
The short US dollar theme could gain legs as Trump’s fiscal policies have yet to move from concept to concrete action, and he has been talking down the dollar because he believes it is too strong. The euro is believed to be some 20% undervalued, sterling by 26% and the yen by around 36% on a purchasing power basis.
Don’t discount potential US growth
Not all of the panellists were ready to jump ship from the US just yet, however. After all, the country’s growth story has been playing out much better than many of its developed market counterparts. The Federal Reserve has already increased its benchmark interest rates three times since December 2015, and is projected to continue on the path to normalising its policy, while other central banks remain accommodative.
“US expectations for growth are in the twos, Europe is sub-two, so while there is the possibility for expectations being surpassed, I think we can’t discount potential growth from the US and potential growth from pockets of Asia, because the sheer nominal growth that is forecasted is still higher in those regions,” said Michael Miranda, chief investment officer at Mesirow Financial Currency Management, which manages more than $60 billion in currency risk overlay assets for institutional clients in North America, the UK, Europe and Australia.
Perhaps that is why James Ong, a senior macro strategist and derivatives portfolio manager at Invesco, remains focused on the global growth picture as he invests in currency, rather than Trump noise around fiscal policy.
“I think market expectations for that type of achievement has been significantly reduced, but note equity markets are still doing well, and I think that’s because global growth is in a better place now than it has been since the end of the crisis,” he said.
Patience wearing thin
Still, some level of nervousness persists, especially regarding valuations.
“Currencies are one slice of the pie for what we cover and we have had a lot of patience for the reflation trade, and I think patience is wearing thin,” said Keith Collier, investment strategist in the investment strategy and solutions group at BNY Investment Management.
Meanwhile, Lindahl encourages participants to observe caution over the next few months, especially around dollar positioning.
“The ship had people this way watching the sunset, and now they’re going back to the middle of the ship and shifting the other way. That’s why we believe [that] during the take-off rocket stage for currencies, that shift will happen very clearly and very fast, and for no apparent reason. And that is why it is so dangerous for the next few months to be long dollar,” he added.
