Rates are hopping, markets are churning, and investment positions are coming under challenge. Today we’ll have an investment meeting that challenges one of the bigger themes that we have in our portfolio: investing a strong dollar bias.
We own the dollar index as a fixed income alternative, and the buck has been in a volatile channel over the last few months, and has become somewhat of a swing factor for how we do compared to our bond benchmark. Recently the dollar has been sputtering, raising the question of whether the strong dollar and weak Euro/Yen trade has reversed for a cyclical period. Or maybe we’re simply in the midst of another correction within the current range trade that might present a decent chance to add to the position.
Another way we have expressed a positive dollar theme is in our underweight to commodities. Commodities are priced in dollars and typically exhibit negative correlations with the buck. We have done well to be out of commodities most of the year, as they have suffered on a relative basis compared to equities. But recently we have witnessed a number of oversold commodities bouncing at the same time the dollar has been weakening. The question before the Investment Team is whether or not this bounce represents a playable trend change. The alternative is that recent performance is just another mean reversion bounce in markets that will fizzle and succumb to the longer-term downtrend.
The final challenge to our dollar view comes from our international holdings. Dollar assets and indices (S&P, Dow, etc.) have been outperforming relative to their international counterparts this year; however, we’re now seeing some relative strength coming from Europe. The currencies of international markets are also moving positively compared to the dollar, and our ownership in developed markets is entirely in currency hedged positions – that means they won’t participate if the Euro and Yen start to materially strengthen versus the dollar. So the team will have to decide whether or not we want more European exposure and whether or not we want to continue to hedge currency.
When running tactical globally diversified portfolios, there is almost always something occurring that challenges the thinking and positioning of our portfolios. Today, we step up and challenge the pro dollar bias… Stay tuned to see if any major developments come out of it.
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