Currencies to capitalize on

As central banks around the globe start to act, get ready to make the most of currency opportunities.

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“An important shift is occurring in interest rates, driven by global monetary policies [moving] away from quantitative easing and toward quantitative tightening,” says Luc de la Durantaye, head of asset allocation and currency management at CIBC Asset Management, and manager of the Renaissance Optimal Inflation Opportunities Portfolio. “All else equal, that would push the yield curve higher.”

So far, the Federal Reserve has taken the lead on tightening, “and that’s likely to be followed by the ECB,” he adds.

The potential result: “Further backing up in U.S. and European interest rates.” In contrast, “The yield curve control [of] the Bank of Japan will keep interest rates in Japan relatively low,” says de la Durantaye.

Read: How will rising rates affect a client’s investment portfolio?

Such a scenario “means that, at the very least, the euro will be a supported currency, because you have an economic outlook that is continuing to grow,” he explains. “And the euro is an undervalued currency — particularly relative to the U.S. dollar.”

The main reason for that is the U.S. dollar is relatively expensive. As such, “We don’t see a lot of upside,” says de la Durantaye, despite Fed tightening. In contrast, continued easing by the Bank of Japan “could keep the Yen as a weaker currency.”

Beyond those major currencies, look for opportunities in the Russian ruble, Mexican peso and Indian rupee. “They’re undervalued, provide high interest rates and could very well outperform, certainly, the U.S. dollar and potentially the yen,” says de la Durantaye.

In countries such as Norway and Sweden, as well as in some Eastern European countries, the economic recovery is strong. “These currencies are very undervalued, so there [are] some attractive opportunities,” he says.

So, in addition to the yen, a currency to potentially avoid is the Swiss franc.

Says de la Durantaye: “With the global economic environment that continues to improve, the need for safe haven currencies will continue to diminish, and we could see continued weakness in the Swiss Franc.”

Read: From the loonie to the euro: currency update

Where rates are headed

Along with the central bank tightening trend, consider the global economic outlook, says de la Durantaye. “It’s a synchronized [global] expansion that we see, so that could confirm [a] gentle rise in interest rates” resulting from tightening.

Indeed, gentle is an apt description, since policymakers must consider current low rates of inflation before making moves.

“Central banks are very concerned because inflation continues to be below their target[s],” says de la Durantaye. What’s more, the banks “want to be measured […] in their removal of quantitative easing.”

Read:

Interest rates in U.K. will rise for first time in decade

Monetary policy to be data dependent: BoC