Is It Game Over for the Greenback?

By:

Chief Investment Officer (CIO), BMO Global Asset Management

Weekly Commentary

Market Recap

  • The S&P 500 is up a solid 7% this year, despite concerns about the economy, debt ceiling, and ongoing stress in the bank sector.
  • That is impressive resilience given all of the challenges thrown at the market.
  • There are a number of reasons why stocks and risk assets more broadly have held in from a macro perspective.

China

Tensions between China and both Canada and the United States have ratcheted up in recent weeks, prompting concerns about further escalation and potential risk for investors. We do expect tensions to continue to grow as we approach 2024, which is a U.S. presidential election year. The current political environment demands that politicians on certain parts of the political spectrum take a hard line on China, and that’s not likely to change in the near term. But that type of rhetoric is nothing new—tension is already being priced in by markets, and we wouldn’t expect the situation to get out of hand. The one potentially worrisome sign would be if we see more news about the de-listing of Chinese stocks, which was an approach more characteristic of the Trump years than the Biden administration. But aside from Tik Tok, which is a somewhat different situation, de-listings haven’t materialized. We did recently take down our Emerging Markets (EM) view from bullish to slightly bullish, but that wasn’t related to geopolitical tension—we simply saw growth underperform expectations.

Bottom Line: Rising tensions are par for the course as we approach an election year.

US Dollar (USD)

Recently, a number of articles have suggested that we may be approaching the end of the USD’s era of dominance, and that a new paradigm of global finance may be emerging with BRICS (Brazil, Russia, India, China, and South Africa) at its centre. But are these fears justified? This debate has popped up occasionally over the past five or 10 years, especially when gold is doing well, or when Bitcoin bounced back from its lows. The reality is that, for various political and financial reasons, many people don’t want the USD to be the reserve currency, so an attempt to shift away from it is not surprising. But look at which currency strengthened during COVID: it was the greenback. That demonstrated that the USD is still the financial world’s reserve currency, meaning the currency that does well when markets are in fear and the economy is in the tank. Unless we see a massive swing away from that line of thinking, any speculation about a new paradigm is overblown. Recently, we have seen the strength of the USD starting to come off. But that’s because the risk appetite and interest rate environment have changed, not because it’s losing dominance in a broader sense. Despite attempts to change the status quo, the USD is still where investors go in a crisis.

Bottom Line: Rumours of the greenback’s demise have been greatly exaggerated.

Inflation

The latest U.S. inflation number came in lower than expected, and with other major economies either reporting soon or having already reported, it’s worth taking a step back and examining what the inflation picture looks like from region to region. In Europe, the inflation situation is improving. It was at a higher inflation point than other economies, and while others regions’ numbers were starting to come down, Europe’s were still going up. But now, it has also peaked, and the numbers are beginning to recede. It’s likely that the situation will play out like it did in the U.S. and Canada: after inflation peaks, it drops quicky to a certain level and then gets stickier. Europe still needs to be more aggressive on interest rates than North America, with 25-basis-point hikes more likely than larger ones given the improving numbers. On the other side of the pond, Canada’s inflation situation has been rosier than that of the U.S., but that momentum is starting to shift in the U.S.’s favour. In general, we don’t anticipate an aggressive policy from the Bank of Canada, even though inflation is likely to be fairly sticky going forward. There have been whispers about a possible rate increase, and while it’s not a zero-probability event, the bar for it to happen is high. On the U.S. front, there are two ways to read the situation. One is that inflation numbers are coming down, which could give the Federal Reserve ammunition to pause at the next meeting. Another is that inflation didn’t come down strongly enough to precipitate a rate cut—which is important, because a rate cut is currently being priced in by markets. The point is that you can find a hawk or a dove in the latest numbers depending on what you’re looking for. We continue to believe that a rate cut is off the table— even as the banking crisis unfolded, the jobs numbers and Consumer Price Index (CPI) print were good.

Bottom Line: The U.S. is likely not going to reach its 2% inflation target this year, which means there’s little reason for the Fed to cut rates.

Positioning

In previous months, we were neutral on Equities except in our more conservative portfolios. Now, we’ve gone slightly underweight Equities across the board. The rationale is based on three things. First, we don’t see a massive driver of significant upside from here, at least not in the short term, while there are a number of potential risks on the downside. Second, while earnings largely beat expectations, they were still relatively low, and that could have an impact on the consumer in one-two combination with a potential slowdown of the economy. And third, the deterioration of the economy and the employment situation is likely to accelerate. Putting those factors together along with ongoing geopolitical risk and other headwinds, it just makes sense for us to be a little more defensive. It’s also important to remember that if we’re overreacting and markets do really well, our clients will have relatively good results—we still have Equity exposure, we’re just slightly underweight. But if we’re right and the economy does weaken further, we’re protecting the downside. Regionally, we did move our Canadian exposure to neutral from slightly bearish, and our EM exposure to slightly bullish from bullish. While we still like EM, and China in particular, the underlying fundamentals of the Canadian market are likely better for downside protection. And on the fixed income front, we decreased our high yield exposure, and you’re likely to see us gradually increase our Duration exposure.

BMO’S “FIVE LENSES” STRATEGY

Originally Posted May 15, 2023 – Is It Game Over for the Greenback?

Disclosures:

The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.

For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

®/™Registered trademarks/trademark of Bank of Montreal, used under licence.

One thought on “Is It Game Over for the Greenback?”

Join the Discussion

Thank you for engaging with IBKR Campus. If you have a general question, it may already be covered in our FAQs. If you have an account-specific question or concern, please reach out to Client Services.

Your email address will not be published. Required fields are marked *

Disclosure: BMO Exchange Traded Funds

Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the BMO ETF’s prospectus.  BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal.

®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from BMO Exchange Traded Funds and is being posted with its permission. The views expressed in this material are solely those of the author and/or BMO Exchange Traded Funds and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: ETFs

Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Forex

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.