Forming positions in G10 currencies based on changes in monetary policy
On the foreign exchange market, new drivers of exchange rate are constantly emerging. Brexit, the tax reform in the US, the trade war, the Italian crisis... But the divergence in the monetary policy of central banks always works. If one of them is going to raise rates, and the other, on the contrary, intends to adhere to monetary expansion, then carry traders have an excellent opportunity to play on the difference in the yield of bonds of the two countries. The stage of the economic cycle is of great importance. For example, the States are close to its end, so rumors of an increase in the federal funds rate are less of a concern to investors than, for example, the completion of the European QE.
Based on data from central banks and surveys of experts Bloomberg developed a map of changes in monetary policy in 2018-2019. In my opinion, it will, other things being equal, allow the formation of a competitive foreign exchange portfolio in the third or fourth quarter of this year.
Map of changes in the monetary policy of central banks
Red color (monetary restriction) marks 9 out of 10 G10 currencies. The only exception is the Japanese yen, where the inability of inflation to reach a target of 2% makes the BoJ use the policy of cheap money to its fullest.
If we start from the factor of the end of the economic cycle in the US, in October-December, due to the recovery of the world economy in July-September, the USD index may return to a downward trend. At the same time, Bloomberg experts expect that some central banks issuing G10 currencies will raise rates as early as 2018.
Forecasts for rate changes in 2018-2019
We are talking about Canada, Norway, Sweden, Britain, and the United States. In this case, BoC and the Fed, most likely, will resort to a monetary restriction twice. This circumstance allows us to speak about undervaluation of the Canadian dollar. Despite the bullish conjuncture of the oil market and expectations of an increase in the overnight rate, the loonie is one of the outsiders of the G10. In my opinion, strong statistics on the labor market of the Maple Leaf Country in June will enable it to be included in the portfolio for the third quarter. It also makes sense to put Norwegian and Swedish kroner, as well as the British pound. The market will definitely price in the expectations of a tightening of the monetary policy by their central bank-issuers in the fourth quarter. As in the case of the Canadian dollar, the reason for buying is strong macroeconomic statistics.
Hopes for the start of the normalization of the monetary policy by the ECB, the Reserve banks of Australia and New Zealand in 2019 may become the basis for purchases of the euro, auzzie and kiwi in October-December. The latter two currencies, due to the growing risks of slowing down of the Chinese economy, feel extremely unimportant, which allows us to count on the implementation of the principle of "buy cheap - sell expensive".
It is obvious that exchange rates are influenced not only by divergence in monetary policy, so the above scheme can be amended taking into account the development of the issue of trade wars, parliamentary elections in the US, Brexit or the presentation of the draft budget of Italy by the new government.
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