Currencies in a rising rate environment

With inflation at its highest in decades and interest rates continuing to rise, investors should look for opportunities — and areas to avoid — in their currency exposure.

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“Higher inflation and higher interest rates have definitely impacted the outlook for global currencies,” said Michael Sager, vice-president, multi-asset and currency with CIBC Asset Management, in a recent interview. 

The main beneficiary has been the U.S. dollar. The greenback started the year strong, Sager said, but was relatively overvalued in terms of long-term valuation metrics. However, market uncertainty and rising rates typically support the U.S. dollar, and Sager said that will likely continue in the coming months.  

“The U.S. dollar has certainly been a primary beneficiary of the outlook for inflation and interest rates that we’re currently seeing,” he said.

In terms of other picks for the currency markets, Sager looks at currencies of countries with relatively good long-term growth prospects. For example, he likes the Mexican peso and Indian rupee due to their attractive valuations and improving fundamentals. He said countries that “are not significantly positively correlated to a slowing global economy” are the most attractive.

More cyclical currencies such as the Canadian dollar and the New Zealand dollar, which rise when the economy is strong and depreciate when it’s weaker, can be exploited in this environment, Sager said. 

The loonie slid to two-year lows last week after the U.S. Federal Reserve raised its interest rate by another 75 basis points. The loonie was trading below US$0.73 on Monday.

In terms of currencies to avoid, Sager said the euro, the British pound and the Swedish krona are risky now. The risk of a recession is elevated in Europe as a result of the energy crisis and tightening monetary policy, he said.

The pound fell to an all-time low against the U.S. dollar on Monday.

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Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.