2018 has been an eventful year, with an ongoing trade war, tightening monetary policy from the Federal Reserve, increasing pressure in the Brexit negotiations, and a new Italian government which has resurrected fears about the stability of the Eurozone Despite this, G10 FX volatility has remained remarkably subdued In this blog post, we construct an econometric model to …read more
The case for investing in emerging market currencies remains strong, despite the recent volatility. A combination of rising US rates, concerns about the stability of the global trading system and local political turmoil have generated headwinds for EM currencies. However, the recent sell-off has considerably boosted return expectations given the current level of undervaluation in …read more
• Have we witnessed the formation of a US equity bubble on the verge of bursting? Or can current valuations be justified by a shift in macro fundamentals?
• We model an S&P 500 fair value range and attribute medium-term price changes to their fundamental drivers. We find that the nine-year bull run can be largely explained by rising dividends and falling real yields. Elevated valuations are consistent with compressed discount rates and, without a significant repricing of real yields, they could be here to stay.
• The euro has been very strong this year (appreciating over 10% YtD against the dollar)
• Fair value (measured using PPP) is 1.33, suggesting the EURUSD pair is still around 15% undervalued
• In this blog post we use a FEER (Fundamental Equilibrium Exchange Rate) framework to investigate what level exchange rate is consistent with a sustainable balance of payments. Our results are broadly consistent with PPP valuations, and suggest that there is a risk of further euro appreciation to come
• Strategies for earning sustainable return in currency are more nuanced than in equities or bonds due to the absence of a “long-only” beta
• We argue that there are, however, strategies to target sustainable returns in the currency space
• This blog post describes growth, carry, momentum and value as potential sources of return in currency
In April we noted the uncertainty that a Brexit vote would bring to the British economy.
In this post, we examine how the economic risk the UK now faces may be manifested in a post-Brexit UK. In particular, we look at a “worst case scenario”, and what this might mean for the economy, and the currency.
Do market capitalisation driven weights make sense from a currency perspective? If not, how can we go about getting closer to a more balanced and optimal currency mix as part of international asset allocation?
The currency war “truce” at the G20 meeting in February of this year has effectively placed political pressure on Japan to refrain from further depreciation of the yen. We investigate whether this has frozen USDJPY at its “fair value”. Although a naïve reading of PPP figures suggests that the outcome is reasonable, adjustment for productivity differentials suggests that the yen is now heavily overvalued versus the dollar, with attendant negative consequences for the Japanese economy.