Fixed Income Outlook  |  Q3 2020

Currency views

Putnam Investments

Currency views

The dollar is an expensive safe haven

The dollar’s support from its high-yielding status has largely disappeared. The Fed has cut rates to zero, unveiled an unlimited QE package, and backed other financing measures. Growth looks to be troughing, and mobility restrictions are slowly being lifted. Investors may look to other currencies with more compelling valuations and better prospective recoveries. It could result in a weaker dollar. The presidential elections are likely to create headwinds. The dollar remains an expensive safe haven for capital during higher levels of uncertainty. Therefore, currencies such as the Swiss franc and the yen are more attractive in our view.

Euro likely to rally in near term

The outlook for the euro remains dominated by relative monetary policy, growth, and political risk premium. The ECB has expanded its asset purchases through various programs, including buying bonds. The single currency has rallied in recent weeks. We expect the euro will continue to appreciate in the near term, supported by the lifting of lockdowns in Europe and Asia with better results than in the United States.

British pound capped by EU trade talks

Neither the idiosyncratic story driven by Brexit nor the ongoing negotiations on future trade relations has affected trading of the British pound. The currency has been at the mercy of global risk appetite and implications of the virus on prospective economic growth. Brexit’s transition period cannot be extended beyond the end of this year, increasing the probability of a harder exit from the EU. This should keep the pound as an underperformer.

Yen likely to appreciate

The Bank of Japan continues to expand measures designed to encourage lending, but it has left its yield-curve control and interest rates unchanged. With the rate differential in currency forwards now fully reflecting the rate cuts by the Fed, purchases of hedged foreign bonds will likely replace unhedged purchases. We expect this will place less downside pressure on the yen. As purchases of foreign equity abates and outward direct investment slows, we should see the yen appreciate.


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