Thomas Stolper, Chief Investment Officer at Embankment Currency Research, is hosted by Naji Nehme, Chief Investment Officer at Petiole Asset Management AG to discuss changes within central banks to fight inflation. Below are the highlights of the webinar.
- After eventless years in the currency markets, the developments remind Stolper of the extreme market swings in the 1980s and the 1990s, amid the Plaza Accord and the Louvre Accord in 1985 and 1987 respectively.
- This is the biggest inflation shock since the 1980s, which is the main problem. As inflation increases, policy issues emerge; thus policy makers, central banks, and governments are under enormous pressure.
- Central banks have three strategies against inflation: wait and hope the problem goes away, act early to avoid the worst, or strengthen currency to reduce import
- Since late 2021, G10 interest rate changes have become less coordinated as central banks grapple with inflation.
- Currencies respond to interest rates moves. Last year was a clear example as currencies appreciated when central banks hiked rates.
- An international portfolio in multiple countries benefits from maintaining exposure to assets denominated in an undervalued currency when the currency re-appreciates. But exposure to an overvalued currency must be hedged.
- Stolper believes there will be some parity between the euro and US dollar by year end, stressing that much can happen in the markets amid the volatility.
- While the Japanese yen is extremely undervalued, it has a history of recovering quickly. Also, Japan is not under any major inflation threat.
- The Chinese renminbi is unlikely to become a reserve currency until external investments are allowed into the country.
- Commodity currencies, such as the New Zealand dollar, Canadian dollar and Australian dollar are promising candidates for value appreciation.
- The success of currency investors depends on market conditions. They need to be critical and agile in an environment of big risk premiums, momentum, and sharp reversals.
- The Japanese yen, the Swiss franc and the Canadian dollar are likely to strengthen against the US dollar, while the euro, the sterling, the Russian ruble, the Chinese renminbi and the Turkish lira weaken.
Watch the full webinar above.
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