Global View Major 2018 Risks (Part 4 of 4) Why The Consensus Could Be Wrong Again About The US Dollar and Sterling January 2018
Major 2018 Risks (Part 4 of 4) - Why The Consensus Could Be Wrong Again About The US Dollar and SterlingWorried investors are looking to where 'reverse QE' policies first play out? We expect exchange rates to bear the brunt of the coming adjustment. Thus, the unwinding of distorting Central Banks' QE policies will further reshape forex markets in 2018 and add to last year's two big trends of: (1) monetisation of US dollar capital inflows by EM policy-makers and (2) rising European currencies. Although we are still watching the US dollar closely, our models are admittedly less negative than they were a year ago. Our base case is for modest 5-10% US dollar weakness in 2018, with the bulk of the slide occurring relative to European currencies, notably the Euro and sterling. The Euro could test US$1.35/E and sterling US$1.50/£.
CrossBorder Capital Ltd (CrossBorder) is a London based, FCA registered, independent investment firm founded in 1996. It is owned by its partners and has no affiliations with banks, stockbrokers or other financial institutions.
CrossBorder's core competence is the measurement and analysis of global liquidity flows. Liquidity is a source of funds, in contrast to money which is a use of funds. It is defined as the flow of cash plus credit, or more explicitly as savings plus the change in base money plus the change in bank credit. Liquidity is therefore a more comprehensive measurement of fund flows than the monetary aggregates used traditionally. Liquidity research is applied to determining the outlook for a range of asset classes including equities, fixed income, currencies and hedge fund styles over varying time horizons.
Central to this analysis is the monthly collection and analysis of balance sheet data from over seventy of the world's central banks to quantify the level and direction of liquidity in each country. This data is publicly available, aggregate as opposed to sample, and rarely significantly revised. It is also little used by investors, and CrossBorder's prime utility is bringing this set of data to investors in a timely and user-friendly way.
CrossBorder's insights rest on two philosophical assertions: first, there is a regular cycle of liquidity, and asset class price movements tend to move sequentially over the cycle. By measuring where we are on it, we can significantly reduce 'fat tail' outcomes in our predictions for asset price movements. Secondly, weightings of asset classes held by investors in aggregate tend to revert to the long term mean. By measuring the variance from this mean, we can understand whether a particular trade is 'crowded' or the reverse.
CrossBorder offers these insights both as the Liquidity Research research service, and in the form of systematically allocated in-house funds. Clients of the Liquidity Research service include leading banks, fund managers (both traditional and hedge) and insurance companies located worldwide. CrossBorder additionally manages and advises on tactical asset allocation products for third parties.
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