Exploring the dynamics and impact of currencies
The example of FP Carmignac Global Bond
Currency Management is one of the 3 pillars of our active global macro fixed income process, alongside duration and credit. Abdelak Adjriou, Lead portfolio manager for the FP Carmignac Global Bond fund, sees currency management as an important tool to add both alpha and downside protection.
Our 3-step approach to currencies in a nutshell
Step 1: US dollar versus rest of the world currencies
Understanding the USD is our primary focus when analyzing the market from a top-down perspective. We meticulously evaluate several crucial sub-factors that contribute to the overall performance of this asset: the growth differential, the real interest rates impact, and the safe-haven status.
UNDERSTANDING THE GROWTH DIFFERENTIAL FACTOR
The principle is simple: we compare the performance of the US economy to other global economies, to determine the potential impact on the USD.
FX: Where next for the USD?
The USD’s decade-long cycles: Breaking the pattern in the current era? For how long?
The USD tends to exhibit a trend-following behavior. Periods in which the US economy outperformed the ‘Rest of the World’ are mid-70s to 85, early 90s to 2002 and the latest period goes from ’11 to date. Consequently, during these same periods, the USD has outperformed the rest of the currencies.
Today, the USD cycle is breaking this 8–10-year pattern mainly supported by the exceptionalism in US growth and the ongoing US fiscal stimuli. Our view is that the turning point from the USD cycle peak may be occurring, but it is certainly expected to be slower than initially predicted. As, the US growth starts to slow down this should also affect the USD.
DOLLAR AS DRIVEN BY REAL INTEREST RATES’ STRENGTH
Typically, the relationship between the "growth differential" and the real interest rate differential is closely intertwined. However, there are instances when this connection breaks, and the sole indicator of the dollar's trajectory becomes the real interest rates. Hence this element too has an important role in our process.
THE USD AS A SAFE HEAVEN
During recessions too, the USD value tends to rise as it serves as a safe haven. This dual role of the USD, as a growth proxy and a safe haven, is attributed to its status as the world's primary reserve currency and the stability of the US financial system.
Step 2: Creating alpha through bottom-up currency selection
SELECTING EMERGING MARKET CURRENCIES: TRADE BALANCE DYNAMICS ARE KEY
Emerging market currencies are influenced by fundamental and technical factors that shape their value such as real interest rates and current account dynamics. One of the most important factors is the flow of money into a country from abroad, monitored through the current account and more specifically the trade balance. A positive and expanding trade balance, indicates more exports than imports, leads to money inflows and strengthens the currency of a country.
EM currencies
Trade balances surpluses benefit EM FX
As of today, we have a positive outlook on the Chilean Peso in our Global Bond strategy, primarily due to its significant growth and positive dynamics in its Current Account/Trade Balance. Chile has consistently recorded trade surpluses since 1999, and its growth dynamics have been particularly strong since 2022, largely driven by increased copper shipments. Another currency that exemplifies the relationship between Trade Balance dynamics and currency valuations is the Polish Zloty (PLN), as depicted in the chart above. Therefore, our key takeaway is the importance of considering trade balance and current account dynamics in conjunction with currency valuations.
SELECTING DEVELOPED MARKET CURRENCIES: FOLLOW THE MONEY!
Developed market currencies on the other hand, are influenced by growth, real rates and specifically the dynamics of financial accounts, another sub-account of the balance of payments. That, for instance, means that countries with higher real interest rates may attract bond investors and capital, leading to a positive impact on their currency valuations. Additionally, countries with attractive and performing stock markets tend to also draw capital, further bolstering their currency. For example, in the 1990s, the Swedish Krona experienced a remarkable appreciation due to Sweden's stringent monetary policy aimed at combating inflation. This resulted in higher interest rates compared to other G10 countries, attracting a significant influx of capital, and sparking the appreciation of the Swedish Krona.
Step 3: Currency valuations
When it comes to assessing currency valuations, we utilize various models to determine the relative strength or weakness of a currency. One commonly used model is the Real Effective Exchange Rate (REER), which compares a country's currency to the currencies of its trading partners, considering inflation. This analysis helps us determine whether a currency is overvalued or undervalued.
Another model we consider is the Purchasing Power Parity (PPP), which compares the prices of goods and services between countries to determine the fair value of a currency. This valuation model is particularly effective in extreme scenarios, where a currency is over or under valued by more than 15% for developed market (DM) currencies or 30% for emerging market (EM) currencies.
SUMMARY OF CURRENT THINKING (AUGUST 2024)
| Cautions USD | Cf. As per discussed above. | 17% |
| Examples of convictions, DMS (Longs) | JPY:Despite the current BoJ hiking cycle, the JPY continues to remain undervalued. Factors such as the current account surplus, income balance, and rising net external position, and a more active Bank of Japan should remain supportive. | 5% |
| NOK: We are long on the NOK based on the currency’s current undervaluation. In addition, the possibility that Norges Bank may remain hawkish and delay starting its cutting cycle reinforces our view. Meanwhile, other G10 central banks, especially the FED or the ECB are becoming more confident or have already started their own plans to cut interest rates. Hence the rate differential is supportive of the NOK as well. | 5% | |
| Examples of convictions, EM Longs | BRL: We remain positive of the Brazilian Real which is supported by a positive Trade Balance and excessively positive real rates. | 5% |
| INR: This positive view on the Indian Rupiah reflects India’s rapidly growing economy. India’s Trade Balance as also drastically improved especially thanks to exporting services. The currency has become significantly less volatile due to the central bank's inflation-related mandate, which has also helped reduce the budget deficit. Lastly, the inclusion of India's bond in a significant global index lately will continue have a positive impact on the currency. | 3% | |
| Shorts | CNH: China's deflationary pressures are expected to create opportunities for further rate cuts and currency depreciation, hence our short in the currency. In addition, this position is a hedge for a potential win of Trum presidency in US elections. | -5% |
Source: Carmignac as of 29/08/2024.
Portfolio composition may be changed anytime without notice. *Net currency includes all currencies except Eur.
**Credit exposure includes spread risk, ie. corporate credit and EM sovereign credit (external debt).
Want to know more about our global macroeconomic approach to Fixed Income markets?
Visit the fund pageFP Carmignac Global Bond A GBP ACC HGD
- Recommended minimum investment horizon
- 2 years
- Risk indicator*
- 3/7
- SFDR - Fund Classification
- Article -
*Risk Scale from the KIID (Key Investor Information Document). Risk 1 does not mean a risk-free investment. This indicator may change over time.
Main risks of the fund
Fees
- Maximum subscription fees paid to distributors
- 0,00%
- Redemption Fees
- 0,00%
- Conversion Fee
-
- Ongoing Charges
- 0.70%
- Management Fees
- 0,62% EXT
- Performance Fees
-
Footnote
Related articles
Merger of “Flexible Allocation 2024” into “Flexible Bond” in Carmignac Portfolio
Carmignac appoints UK Business Development Director
Marketing communication. Please refer to the KID/KIID, prospectus of the fund before making any final investment decisions. This document is intended for professional clients.
This material may not be reproduced, in whole or in part, without prior authorisation from the Management Company. This material does not constitute a subscription offer, nor does it constitute investment advice. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. This material has been provided to you for informational purposes only and may not be relied upon by you in evaluating the merits of investing in any securities or interests referred to herein or for any other purposes. The information contained in this material may be partial information and may be modified without prior notice. They are expressed as of the date of writing and are derived from proprietary and non-proprietary sources deemed by Carmignac to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Carmignac, its officers, employees or agents.
Past performance is not necessarily indicative of future performance. Performances are net of fees (excluding possible entrance fees charged by the distributor). The return may increase or decrease as a result of currency fluctuations, for the shares which are not currency-hedged.
Reference to certain securities and financial instruments is for illustrative purposes to highlight stocks that are or have been included in the portfolios of funds in the Carmignac range. This is not intended to promote direct investment in those instruments, nor does it constitute investment advice. The Management Company is not subject to prohibition on trading in these instruments prior to issuing any communication. The portfolios of Carmignac funds may change without previous notice. The reference to a ranking or prize, is no guarantee of the future results of the UCIS or the manager.
Morningstar Rating™ : © Morningstar, Inc. All Rights Reserved. The information contained herein: is proprietary to Morningstar and/or its content providers; may not be copied or distributed; and is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
Access to the Funds may be subject to restrictions regarding certain persons or countries. This material is not directed to any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the material or availability of this material is prohibited. Persons in respect of whom such prohibitions apply must not access this material. Taxation depends on the situation of the individual. The Funds are not registered for retail distribution in Asia, in Japan, in North America, nor are they registered in South America. Carmignac Funds are registered in Singapore as restricted foreign scheme (for professional clients only). The Funds have not been registered under the US Securities Act of 1933. The Funds may not be offered or sold, directly or indirectly, for the benefit or on behalf of a «U.S. person», according to the definition of the US Regulation S and FATCA.
The risks, fees and ongoing charges are described in the KID (Key Information Document). The KID must be made available to the subscriber prior to subscription. The subscriber must read the KID. Investors may lose some or all their capital, as the capital in the funds are not guaranteed. The Funds present a risk of loss of capital.
The Funds’ prospectus, KIDs, NAVs and annual reports are available at www.carmignac.com, or upon request to the Management Carmignac Portfolio refers to the sub-funds of Carmignac Portfolio SICAV, an investment company under Luxembourg law, conforming to the UCITS Directive. The French investment funds (fonds communs de placement or FCP) are common funds in contractual form conforming to the UCITS or AIFM Directive under French law.
In France, Luxembourg, Sweden: The risks, fees and ongoing charges are described in the KID (Key Information Document). The KID must be made available to the subscriber prior to subscription. The subscriber must read the KID. Investors may lose some or all their capital, as the capital in the funds are not guaranteed. The Funds present a risk of loss of capital. The Funds’ prospectus, KIDs, NAV and annual reports are available at www.carmignac.com, or upon request to the Management.
In the United Kingdom: the Funds’ respective prospectuses, KIIDs and annual reports are available at www.carmignac.co.uk, or upon request to the Management Company, or for the French Funds, at the offices of the Facilities Agent at BNP PARIBAS SECURITIES SERVICES, operating through its branch in London: 55 Moorgate, London EC2R. This document was prepared by Carmignac Gestion, Carmignac Gestion Luxembourg or Carmignac UK Ltd. FP Carmignac ICVC (the “Company”) is an Investment Company with variable capital incorporated in England and Wales under registered number 839620 and is authorised by the FCA with effect from 4 April 2019 and launched on 15 May 2019. FundRock Partners Limited is the Authorised Corporate Director (the “ACD”) of the Company and is authorised and regulated by the FCA. Registered Office: Hamilton Centre, Rodney Way, Chelmsford, Essex, CM1 3BY, UK; Registered in England and Wales with number 4162989. Carmignac Gestion Luxembourg SA has been appointed as the Investment Manager and distributor in respect of the Company. Carmignac UK Ltd (Registered in England and Wales with number 14162894) has been appointed as a sub-Investment Manager of the Company and is authorised and regulated by the Financial Conduct Authority with FRN:984288.
In Switzerland: the prospectus, KIDs and annual report are available at www.carmignac.ch, or through our representative in Switzerland, CACEIS (Switzerland), S.A., Route de Signy 35, CH-1260 Nyon. The paying agent is CACEIS Bank, Montrouge, Nyon Branch / Switzerland, Route de Signy 35, 1260 Nyon.
The Management Company can cease promotion in your country anytime.
Investors have access to a summary of their rights in English on the following links: UK ; Switzerland ; France ; Luxembourg ; Sweden.