Investment Clock insights

A period of dollar weakness?


Trevor Greetham

4 February 2016

The weak services Purchasing Managers Index in the US yesterday calls into question our view that the consumer is benefitting from falling energy prices, at least in the short term. This kind of data is also likely to cause a bit of a rethink at the US Federal Reserve (Fed) and as a result it triggered a sharp sell-off in the dollar against all crosses on the foreign exchanges.

A temporary softening in the US economy could end up positive for equities. However, the Fed looks certain to skip a March rate hike now. Meanwhile the euro and yen have moved up a lot, making a significant European Central Bank easing move likely next month and increasing the chances that Japan moves interest rates even more negative over the next few months.

An easier path of monetary policy should help to trigger a revival in stock markets as it did last autumn. We have added to our overweight position in equities during recent weakness.
A period of dollar weakness should offer some relief to the embattled US manufacturing sector and to a wide range of commodity sensitive investments. We are covering some of our long held underweight in Emerging Market equities, funded by taking the US to a small underweight and we would also cover short positions in the commodity sensitive Australian and Canadian dollar.
We remain overweight Europe and Japan where policy will remain loosest and would continue to hedge euro and yen exposure where possible.

An easier path of monetary policy should help to trigger a revival in stock markets as it did last autumn. We have added to our overweight position in equities during recent weakness.

A period of dollar weakness should offer some relief to the embattled US manufacturing sector and to a wide range of commodity sensitive investments. We are covering some of our long held underweight in emerging market equities, funded by taking the US to a small underweight and we would also cover short positions in the commodity sensitive Australian and Canadian dollar.

We remain overweight Europe and Japan where we expect policy will remain loosest and will continue to hedge euro and yen exposure where possible.

Chart: Institute of Supply Management (ISM) Manufacturing vs ISM Non-Manufacturing

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