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Currency Markets
Dagmara Fijalkowski, MBA, CFA
Head, Global Fixed Income & Currencies (Toronto & London)
RBC Global Asset Management Inc.
The recent performance of the U.S.
dollar has been better than many
expected, with the greenback inching
higher from the all-time lows of a year
ago. The slow appreciation fits with the
gradually improving domestic economy.
For all its progress, the greenback is
still about 10% of its nadir and far
from levels that would be a problem
for U.S. economic growth. Valuations
will not stand in the way of further
strengthening for a long time, as even
with another 10% gain, the U.S. dollar
would remain cheap (Exhibit 1).
We believe there are three reasons
why U.S. dollar bearish bets, 10 years
after the dollar bear market began
and nearly 40% below the highs,
are poor risk-reward trades. First, an
improving current-account deficit,
due to lower reliance on imports to
meet the energy shortfall, is expected
to continue (Exhibit 2). At the same
time, the growth of foreign-exchange
reserves has been slowing since 2009,
which, combined with the Eurozone
crisis, means less need to diversify
reserves by selling the U.S. dollar. The
second reason is valuations, as the
dollar is about 16% undervalued and
just a few percentage points above
its line in the sand (Exhibit 3). Third
is demographics, which, thanks to
immigration, compares favourably not
only to developed countries, but also
to some emerging-market countries like
China and South Korea 1 (Exhibit 4).
1 These LT fundamentals have been discussed in
more depth in the Global Investment Outlook,
Spring 2012.
EXHIBIT 1.
Billions of Cubic Feet
145
135
125
115
105
95
85
75
65
-2,500
USD Down
8 yrs
-26%
Long-Term U.S. Dollar Cycles
Trade-Weighted USD Index (Nominal, Major Currencies)
USD Up
6 yrs
+67%
USD Down
10 yrs
-47%
USD Up
7 yrs
+43%
USD Down
10 yrs?
-40%
1971 1975 1980 1984 1989 1993 1998 2003 2007 2012
EXHIBIT 2.
5,000
2,500
Source: Bloomberg, Deutsche Bank
0
U.S. Energy Shortfall
U.S. Natural Gas Shortfall
-5,000
1982 1991 2001 2011
Source: U.S. Energy
In the meantime, while we are waiting
for dollar-bottoming to signal the
turn of the trend, holding the dollar
offers other advantages. It remains
the safe-haven currency, as its longterm
correlation with risky assets is
near 40-year lows (Exhibit 5). This
characteristic comes in very handy for
our portfolios. Exhibit 6 compares highyield
index prices with the relationship
Millions of Barrels
6,000
4,000
2,000
0
-2,000
-4,000
U.S. Crude Oil Shortfall
SAMPLE
-6,000
1982 1992 2002 2012
Source: U.S. Energy
between the U.S. and Canadian dollars.
Their negative correlation, which tends
to be high under normal circumstances,
increases significantly under stressful
periods like last fall (circled). This is
what we refer to when we say that we
include some U.S. dollar holdings in
our portfolios as an insurance policy.
Please note that when stress subsided
and high-yield prices recovered, the
The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012 I 43