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Richard Lawrence. I’m a senior vice-president on the global fixed income team at Brandywine Global Investment Management.
The trade war has had a very interesting impact on global currencies. I would say broadly, the trade war has been a negative for global currency opportunities with the possible exception of owning U.S. dollars, Japanese yen and the Swiss franc — the classic risk-off currencies. And that’s because, of course, the longer that we have this tension between the U.S. and China, the more that drags on business sentiment, the more that impacts the industrial side of the global economy. And that showed up in weaker manufacturing PMIs, data on things like new orders and exports have all been weaker.
So, we’ve effectively had a mini recession in the manufacturing, export and trade side of the global economy. Frankly, it’s been the consumer that’s continued to do the heavy lifting in the global economy, which is why we actually don’t think we’re going into a recession here. And instead it’s been that combination of the global consumer, coupled with a coordinated global easing by central banks around the world. Here we are in mid-October and we’ve had 27 countries cut rates over the last six months. But the trade war has not been good, if you’re a currency-oriented investor as we are. We use currency valuation as a significant part of our overall analysis. There are some currencies that we find compellingly attractive right now, but we would need sort of the certainty of that macro environment and the resolution of the trade war to get really excited about taking up the exposure in some of these.
For example, and I’ll use one valuation metric as I quote some of these, which is purchasing power parity, which is one way in which we value currencies. We have our own internal metric there, and you’ve got really high-quality currencies like the Korean won is close to 30% discounted and this was from the end of August. You’ve got really high-quality currencies like the Norwegian krone and the Swedish krona, somewhere between 20% to 25% cheap. Sterling with the Brexit overhang is 23% cheap.
So, currency cheapness, it’s definitely not something that’s been specific to emerging markets, for example. It’s really been a broad-based phenomenon. A lot of it has to do with the strength of the U.S. dollar. We continue to have a view that the U.S. dollar is going to be a weaker, not stronger currency, despite the strength that it has exhibited over the past 18 months. We think a lot of those pillars of support for the U.S. dollar are now eroding with the U-turn by the Fed. The Fed is now expanding the balance sheet. We think the growth divergence with the rest of the world is starting to close. So all of those pillars of support for U.S. dollar strength we think are beginning to diminish, and that’s one way in which we think this value gets unlocked in these undervalued currencies. And the same could be said of a trade war resolution. I think that will be good for unlocking the value in a number of those cheap currencies that I referenced earlier.