The move in the US dollar year-to-date is substantial, but it looks much less dramatic on a year-on-year basis. This is partly an unwind of the ‘Trump trade’ of late 2016; and partly driven by the strength of the euro since the election in France and the run of strong economic data that has come out of Europe – core and periphery alike.
That fall in the US dollar is starting to reverse what had become very depressed inflation expectations. It is also feeding through into the very loose financial conditions we see, which could provide a catalyst for the Federal Reserve (Fed) to act more hawkishly than the market currently anticipates. Similarly, the European Central Bank (ECB) may start to show some concern at the strength of the EUR soon.
In the background there is a co-ordinated move by the Fed, ECB, Bank of England (BoE) and Bank of Japan to get away from zero and negative rates. The BoE may have sounded cautious recently, but at some point it, too, will have to turn its focus back to its inflation target rather than the economic uncertainty surrounding Brexit.
We have been positioning for more market volatility. Our Swiss franc short has worked well and we are taking some profits there. We are also buying the US dollar back a little, as well as sterling and Japanese yen. We remain slightly short the euro at these levels.
Ugo Lancioni, global head of currency at Neuberger Berman