Investing in currencies isn’t easy in today’s global environment.

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“We’ve had a significant impact on the currency complex as a result of the Covid-19 pandemic,” said Richard Lawrence, senior vice-president of global fixed income at Brandywine Global Investment Management in Philadelphia, Pa., during a May 18 interview.

The year began in a “fairly quiet fashion,” with only modest appreciation of the U.S. dollar in January and February, he said.

But then, as the pandemic worsened, “all hell broke loose and there was about a two-week period in the middle of March where, if you didn’t own the U.S. dollar, whatever you did own went down and went down fast — in particular emerging market currencies.”

Lawrence also pointed to commodity-influenced currencies, such as the Colombian peso, the Russian ruble and the Norwegian krone, which took a hit in part due to a lack of dollar liquidity.

The U.S. Dollar Index, which tracks the strength of the greenback compared with other currencies, has risen roughly 1% year to date. In contrast, MSCI’s International Emerging Market Currencies Index has fallen.

Normally, Lawrence said, discounted currencies create opportunities to find value, but the pandemic is complicating matters.

“When a currency goes down, it makes the export side of a country’s economy more competitive. It brings more tourists,” he said.

“But in this Covid-19-influenced world, those economic feedback cycle mechanisms aren’t working.”

A cheaper Mexican peso isn’t going to draw U.S. tourists, for example, and Mexican exports are constrained by the slowdown in the American economy, he said.

“That’s a story that’s playing out all over the world,” said Lawrence, whose firm manages the Renaissance Global Bond Private Pool and the Renaissance Global Bond Fund.

The Thai baht is another currency that’s been under pressure due to the pandemic’s impact on the tourism industry. When Covid-19 hit China at the start of the year, Lawrence said he put a short position on the baht in a few portfolios.

As emerging market currencies start to improve, Lawrence called the Brazilian real the “one real laggard.”

“We’ve got a little bit of a political crisis unfolding in Brazil that has created some idiosyncratic risk there,” he said.

Lawrence is starting to look ahead and anticipate which countries will see their export activity pick up, creating potential bargains on discounted currencies.

“We’ve started to focus a little bit more on export-oriented manufacturing economies,” he said, including Korea, Hungary, the Czech Republic and Poland.

Central bank support

In the middle of March, the U.S. Federal Reserve responded “aggressively” to the lack of liquidity in U.S. dollars by expanding swap line arrangements to more countries, Lawrence said.

“There was just simply too much demand for the U.S. dollar and not enough supply,” he said.

While the Fed typically focuses on larger, advanced nations, it started dealing with emerging market central banks in Korea, Brazil and Mexico as well as those in New Zealand, Australia and the Scandinavian countries, Lawrence said.

The Fed also allowed central banks to repo their Treasury securities to gain dollar liquidity, he said.

“Since the Fed stepped in to provide these incremental liquidity measures, we have seen things definitely calm down in the currency markets,” he said.

As the “liquidity squeeze” passed, Lawrence said underperforming markets tied to oil, such as the Norwegian krone and the Colombian peso, started to turn around. Some cyclical currencies in emerging markets, as well as the Australian dollar, have also bounced back, he said.

A Desjardins report this week noted the greenback has depreciated against many currencies since May, citing “the rise in optimism on the financial markets and the drop in demand for safe havens” as key drivers.

But the report also cautioned against making calls too early. It forecast a weakening U.S. dollar moving into 2021, with the loonie appreciating.

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