“Time to rebuild our dollar risk position”
Matt Cobon, head of Government and FX at Columbia Threadneedle Investments, talks about why he is rebuilding his US dollar risk position during this period of dollar weakness.
We believe the weakness in the US dollar is likely to remain temporary and that we can use the current correction to rebuild our dollar risk position.
We have held a bullish view of the outlook for the dollar for some time. This is informed by our belief that the US economy will outperform other advanced economies because:
- it has fewer structural rigidities than, for example, the eurozone;
- it will enjoy greater long-term productivity gains than comparable economies;
- it will become less vulnerable to external energy shocks as its oil production potential increases following the shale energy revolution. Increasing oil output will also reduce the structural current account deficit.
But earlier this year we became concerned that the currency was strengthening beyond what was warranted by the United States’ fundamentals and we positioned accordingly with a tactical short position against a range of currencies. A raft of weaker than-predicted US data dimmed speculation the Federal Reserve (the Fed) was about to raise interest rates. At the same time, the launch of QE in Europe caused investors to revise their expectations of deflation in Europe.
Dollar correction creates opportunity
We have now seen a sizeable fall in the dollar and the currency is now much more fairly valued in our view. The size of the correction is similar to that experienced in comparable structural dollar bull cycles and we do not believe that it should be a matter of concern or indeed a surprise.
However, we continue to believe that the upward trajectory of the dollar will resume over the longer term, reflecting the country’s aforementioned economic advantages. Consequently, we remain dollar bulls, believing that the recent weakness in the US economy will prove temporary in part because we anticipate that consumers will start spending some of the windfall gains reaped from low energy prices.