The US dollar looks set to rally further against most currencies, according to the latest quarterly Russell Investments Global Market Outlook.
Based on metrics covering value, carry and trend, recently-appointed Russell currency strategist, Van Luu, concludes while the US dollar looks expensive, further monetary easing in Japan and Europe could see it rise further.
“The big question in the fourth quarter of 2015 in our view is whether the dollar bull cycle is over or whether the summer consolidation vis-à-vis the other major currencies was merely a pause,” the Russell outlook says.
“All in all, we believe that the outlook is still favourable for the US dollar and pound sterling, but less so than at the beginning of 2015.”
The report notes the US dollar had risen considerably against emerging market currencies and “the dollar-bloc currencies of Canada, Australia and New Zealand”.
Indeed, in an analysis also published last week, Nikko Asset Management, says commodity currencies – including Australia and New Zealand – have “borne the brunt” of the strengthening US dollar over 2015.
“Thus, in the [Asia-Pacific] region, both the Australian and New Zealand dollars are now back to their long term historical averages but Australia appears to be more advanced in its economic adjustment and is starting to show some signs that a weaker currency is boosting sectors such as tourism and education,” the Nikko analysis says.
“In New Zealand, the currency has adjusted to reflect lower dairy prices, but the outlook for dairy prices is likely to be subdued given changes to the laws in Europe to allow exports and the prospect for greater US exports.”
Despite concerns about further commodity price weakness, the Nikko report says the respective currencies could offer investment opportunities.
“There is value in commodity currencies globally, with many now at or close to multi decade lows on a REER [real effective exchange rate] basis,” Nikko says. “However, the outlook for most commodities remains highly uncertain as this is an unusual commodity cycle, driven largely by oversupply even though demand is growing reasonably strongly.”
Of the commodity-linked currencies, Nikko says Australia and New Zealand offer the “safest way” for long-term investors who were “prepared to ride through further volatility”.
“Australia and New Zealand both offer value at these levels and in both countries the exchange rate decline has seen tourism start to become a much more important driver of economic growth,” the study says.
While commodity prices appear moribund, Nikko says “the dovishness” of most major central banks should eventually “support demand and erode the current oversupply in markets”.
In its global market outlook, Russell Investments also offered some support for Australasian investors despite adopting a neutral stance on the region’s equity markets.
“The commodities backdrop remains dour as over-supply and weaker global demand is placing downward pressure on key export prices such as iron ore in Australia and dairy and lumber in New Zealand,” the Russell study says. “However, we believe that stimulus from lower official interest rates and, more cogently, sharply lower exchange rates will cushion the downside in the Australasian region.”