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Monthly Monitor - September 2022
However, there is one asset that has stood tall amidst all the gloom and that is the US dollar (USD). Over the last 12 months, USD has appreciated 18.4%.
Most commentators anticipate that USD strength will continue in the short term, but it may be close to a peak, based on overcrowded positioning and fundamentals. This is a clear risk for investors over-weighted USD assets.
USD’s recent strength can largely be attributed to two factors:
Firstly, USD is perceived as a haven in a volatile world. Investors have a plethora of concerns to manage from both a geopolitical and macroeconomic perspective. Despondent foreign exchange investors are assessing the impact of developments in the Russia/Ukraine conflict, the Italian General Election, tensions between China and Taiwan, and concerns that the new Truss administration may soon be in conflict with the European Union over the Northern Ireland protocol.
Secondly, there are macroeconomic issues that partly explain the strength of USD. Elevated inflation is at the forefront of concerns for policymakers globally. This inflation is largely attributable to the excess monetary and fiscal stimulus provided during the Covid period, supply chain disruption, and pent-up demand for goods and services as developed economies exited lockdowns.
Global Central Banks (with the notable exception of the People’s Bank of China) have increased interest rates aggressively to combat this inflation – and the US Fed has been at the forefront of this. The high yield offered by US cash assets has proved extremely attractive to investors and has caused subsequent capital flows and USD strength.
Over a longer period, as reflected in the chart below, USD strength is also evident.
In the past decade, low global interest rates and innovation have proved beneficial for the USD, as investors piled into growth securities and as exemplified by the FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks. In addition, the Bank of Japan and the Bank of China were for large parts of the graphed period, significant buyers of US Treasuries.
DXY Index (USD vs major developed economy currencies)
Source: Bloomberg, September 2022
To a certain extent, the turnaround of some of the factors mentioned previously, would entail:
In the short term…
Over the medium to long term…
We have held a cautious view on USD this year.
We did not want material exposure to an expensive currency that we believe isn’t going to be a winner through the forthcoming economic cycle (one we believe will be more inflationary and see higher levels of growth in the world excluding the US).
While this view has not been correct to date, we haven’t changed our opinion and – whilst we don’t know the catalyst for USD to weaken – we think the reality is that USD may just run out of buyers as the bad news for the economy/good news for USD appears to be priced in and the risk of over-exposure to USD remains high.
Any views and opinions are those of the Fund Managers, and coverage of any assets held must be taken in context of the constitution of the fund and in no way reflect an investment recommendation.
Capital at risk. If you invest in any Gresham House funds, you may lose some or all of the money you invest. The value of your investment may go down as well as up. This investment may be affected by changes in currency exchange rates. Past performance is not necessarily a guide to future performance.
The above disclaimer and limitations of liability are applicable to the fullest extent permitted by law, whether in Contract, Statute, Tort (including without limitation, negligence) or otherwise.
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