Currency Quarterly Q4 2024 | Insight Investment

Summary

The election of Donald Trump as the next US President is likely to usher in a period of policy discontinuity. The prospect of widespread  tariffs from his administration has already heightened uncertainty. This uncertainty is likely to be magnified by the response of each nation impacted by the tariffs. So, while global growth is currently healthy and expanding at roughly trend pace, the risk from tariffs is that it will slow in 2025.

Within, this backdrop, we expect the US to outperform as a combination of fiscal policy, deregulation and ‘animal spirits’ is likely to at least partially offset any trade disruptions. Nonetheless, given the recent sharp drop in Fed rate cut expectations, we believe the risk is towards lower rates than expected.

While our Alt Risk Premia model is maintaining a long USD exposure, our macro exposure is limited, due to policy uncertainty and extended USD long positions. The single largest risk to our outlook is more limited trade disruptions than we are currently anticipating.

The Alpha view

Our approach to generating returns in currency markets is to use a diversified set of factors that cover key short and medium-term currency drivers. These include macro themes, as well as an additional five risk premia - Carry, Momentum, Volatility, Value, and Quality.

Given the uncertainty around the policy outlook and extended USD long positioning, our exposure in the macro space is limited. Our macro bias is to add to USD longs, but we’d like to see either better levels or cleaner market positioning.

The Alt Risk Premia model also holds a long USD exposure driven by the Quality, Carry, and Momentum factors – Volatility and Value are only partially offsetting the positive USD exposure. Elsewhere, our model favours longs in JPY, NOK, and AUD vs shorts in CAD, EUR, NZD, and CHF.

Figure 1: Insight Currency Absolute Return Exposure

Source: Insight. Data as of December 31, 2024. Note: dark green dot shows aggregate position.

Longer-term valuation overview

For longer-term investors whose investment decisions lean more heavily on valuation metrics, a few points can be made (see Figure 2):

• USD remains close to record overvalued;
• JPY, EUR, SEK,CHF and NOK look very cheap; and
• AUD, CAD, GBP, and NZD are close to fair value.

Figure 2: Local currency overvaluation (+) and undervaluation (-) versus USD

Source: Insight. Data as of December 31, 2024.