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FX chief: six currency calls to make in 2017

Neuberger Berman’s head of global currency, Ugo Lancioni, on the countries to back and where to be wary when it comes to currency.

Currency calls – blowing hot or cold?

The currency market has become increasingly splintered as central bank policy diverges against the backdrop of a pro-growth presidency in the US, and populism provides an uncertain outlook in markets such as Europe.

So, what can investors do? In this gallery, Ugo Lancioni, chief investment officer for global currency at Neuberger Berman, runs through six key currencies to see how currency plays will pan out and the best way to position in these volatile times.

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Currency: euro

Hot, cold or neutral: cold

‘ECB policy is still loose, and a further pickup in inflation would worsen already negative real yields. Lingering concerns about the banking system and Italian politics, as well as potential volatility tied to French, Dutch and German elections, reinforce our slightly negative view. Risks to this are the gradual economic recovery, large current account surplus and higher global growth.’

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Currency: US dollar

Hot, cold or neutral: neutral

‘Strong economic data, yield differentials and the safe haven status of the US dollar support our modestly positive view: tax reform may lead to further dollar strength. Risks include modest overvaluation, uncertainty around Trump policies and the level of dollar strength policymakers will accept.’

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Currency: Canadian dollar

Hot, cold or neutral: cold

‘After recent appreciation, the CAD is overvalued. The deterioration in terms of trade could affect the country with a lag. US import taxes/revised trade agreements could be negative for the economy. The Bank of Canada has adopted a dovish stance. Still, job growth has recently improved, while stronger US expansion and better energy prices could be supportive.’

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Currency: Norwegian krone

Hot, cold or neutral: hot

‘With the Norges Bank signalling optimism about the economy and a potential end to easing, the krone’s valuation remains attractive despite recent appreciation. Weakness could re-emerge if energy prices fall again or if Brexit uncertainty causes a change in monetary stance.’

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Currency: yen

Hot, cold or neutral: neutral

‘Purchasing power parity and real exchange rates suggest the yen is now undervalued, while risk aversion remains a valid trade. Risks include a wide yield differential worsened by rate curve policy, disinflation and erosion of confidence/profits due to stronger yen.’

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