How can FX help your portfolio in 2024?

Any outlook must start with reflection. This time last year, we expected the dollar to ultimately weaken as US rates and growth caught down to the rest of the world. That was happening in fits and starts through the first half of last year, before a renewed bout of US exceptionalism put that story on hold in the second half.

But now this dynamic seems to be playing out once again, the dollar weakened sharply over the last two months as US interest rates got repriced lower.

From here, although we are still bearish on the dollar over the medium term given its overvaluation, the question is “when” the depreciation could take place. We believe the next leg down in the dollar will likely only happen after we see clear signs of an economic slowdown in the US. At this point, economic momentum in the US is still stronger than many other major economies, especially Europe and China. That will likely keep the dollar supported over the next 1-2 quarters.

So what can we do now? We think there are three things investors can consider in the FX space.

Firstly, hedge the currency exposure in your portfolio that is vulnerable to weakness against the dollar and has a carry disadvantage, which includes CNH, TWD, and tactically, EUR. The currency exposure you have includes not only cash, but the local currency denominated securities in your portfolio, natural long exposure in your business or real assets, and future cash inflows, like dividend and interest payouts.  We can use options and forwards to match your exposure, and take advantage of the carry at the moment.

Secondly, liability management. You can use foreign exchange to lower your borrowing costs. At the moment, US dollar interest rates are still pretty high, and we foresee only a gradual easing path from the Federal Reserve, and that means borrowing in the dollar will remain costly for some time. What we can do is to borrow in another currency with lower interest rates and a low chance of meaningful appreciation against the dollar. CNH, for example, is increasingly becoming a popular funding currency.

Last but not the least, increase your portfolio’s allocation to gold. We think gold prices will likely be supported by lower interest rates and fading dollar strength over the next 12 months. For long-term investors, we also favor gold as a strategic allocation in portfolios. We are living in a world of, unfortunately, increasing geopolitical risks and more volatile inflation.

To position for such an environment, we can take reference from what central banks are doing. Over recent years, central banks around the world, especially in emerging markets, have been significantly adding gold to their official reserves, for the exact reasons that we talked about, and this could be instructive. For those who worry that gold may have rallied too much already, we can also use derivatives and structures to buy on dips and achieve more defined outcomes for your gold allocation.