Barclays market watchers in London are betting on a strong US currency. We reproduce their comments below:
- We do not think the path of Fed policy will be fundamentally altered by the dollar’s rise. We still expect the Fed’s first rate increase in summer 2015.
- China’s emergence as a major economy has altered the way risk assets interact with the dollar: a weaker Chinese economy had already led to significant underperformance of energy, materials, and EM equities, well before the dollar’s rise.
- Easy Fed policy helped many commodity currencies diverge from underlying commodity price trends, but this divergence has largely run its course.
- In terms of allocating in a stronger US dollar environment, buying dollars versus other major currencies still looks like the best option. US dollar strength should be felt most acutely against major currencies, notably the euro, while EM currencies already had a large adjustment and should perform better on a relative basis on a modest pickup in global growth.
- Rates divergence trades look attractive again after the recent drop in US yields, most notably in the 5y sector.
- Dollar strength is unlikely to lead to common-currency outperformance of US equities this time around, especially with Fed policy set to get tighter from here. With US equities trading at a 15% premium to the rest of DM and a 40% premium to EM, much of the dollar cycle and US strength is already in the price.