We target EUR/USD and USD/JPY at 1.20 and 140 respectively for year-end. Lower short-dated US rates are going to cut hedging costs and make it cheaper for the buy-side to raise hedge ratios on US assets. At the same time, speculation over the next Federal Reserve Chair and questions over US institutional strength will weigh on the dollar as well.
In Europe, it looks as though the European Central Bank has already concluded – or is nearing the end of – its easing cycle. The Bank of England is proving a little more reticent to cut rates than most would have expected. In general, we look for most European currencies to be rallying against the dollar over the next 18 months and still see the Scandinavian currencies as undervalued. Our top pick within Europe, however, remains the Czech koruna.
In the emerging market space, we expect the softer dollar trend and relatively low volatility to maintain interest in the carry trade. Outperforming regions/countries should be the likes of Latam and Turkey – although politics could resurface in the latter part of September. In Asia, the better external positions suggest North Asian currencies should outperform the South, even though spot currency gains may be modest.
