J.P. Morgan optimistic on ‘risk’ currencies

Rob St George 14 Jan 2013 | News - Comment now

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J.P. Morgan optimistic on ‘risk’ currencies

The Mexican peso should have a hot year

Emerging-market currencies look set to be 2013’s best performers, according to J.P. Morgan Private Bank.

Sara Yates, the bank’s global currency strategist, has forecast that investors’ rising risk appetite will drive them towards such foreign-exchange markets, which she also said she expected to be supported by economic fundamentals.

‘2013 promises to be a year of loose monetary policy and less systemic risk,’ argued Yates. ‘As market confidence grows, we expect investors to feel more comfortable in taking on a larger amount of risk in their search for yield. In other words, we look for risk-on currencies to outperform.’

However, she urged investors to be discerning in their currency selections. Yates highlighted low present valuations, positive real yields, a good economy, and a central bank not adverse to currency appreciation as particularly important.

Her preferred plays include the Mexican peso, the Russian rouble, the South Korean won, and the Chilean peso.

‘The Mexican peso has the strongest relationship with global market sentiment as well as benefiting from an upturn in US economic prospects,’ explained Yates. ‘At the same time it still remains a cheap currency, meaning it has room to appreciate, as well a positive real yield and a central bank that has shown little signs of intervening.’

Yates characterised the copper price as her ‘most bullish call in 2013’, despite the metal’s slip of 0.9 per cent in December. Any copper rally, though, should boost the Chilean peso.

‘In addition to offering investors the highest real rate in our currency universe, a strong sensitivity to an improvement in global sentiment and a decent valuation, the Chilean peso also has the strongest connection to changes in the copper prices of the commodity currencies,’ she commented.

Yates continued: ‘The South Korean won has a lot in its favour. It is one of the more sensitive Asian currencies to global sentiment and has a cheap valuation. We expect the large current account surplus and bond market inflows to continue to support the currency.’

Finally, Yates predicted a strong start to the year from the Russian rouble. ‘In the first half,’ she said, ‘we expect the Russian rouble to perform strongly, supported by cyclical current account flows, our constructive view on the oil price, and the liberalisation of the OFZ bond market.’

Related topics: Currencies, Income investing

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