Foreign Exchange

We entered 2018 without a clear view on the USD and consequently we held long exposures in Asian currencies (SGD and THB) and short exposures in the antipodeans (AUD and NZD).

In mid April, we felt that the USD was ripe for a rebound and we played a long USD exposure through a basket of currencies including: AUD, CNH, IDR, KRW, PHP and NZD. Our bullish USD view paid off with the antipodean currencies weakening and from mid-May, we observed a sharp decline in the value of the CNH. While we maintained a bearish view on IDR and PHP, we have been surprised by their resilience although we attribute strength in the former to concerted, and we believe flawed, policymaker action.

We then shifted our attention to short exposures in SGD and JPY. In our opinion, SGD remains vulnerable to Sino-US trade tensions, while we believe that the yen is now more vulnerable to rising US-Japan interest rate differentials, renewed USD strength, and increasing concerns about growth and inflation prospects in Japan.

Last updated: 20 July 2018

Fixed Income

We entered 2018 with a bearish view on US rates, but we expected that outside countries in Asia-Pacific with clear monetary policy linkages to the US that spill over to local fixed income markets such as Hong Kong and Singapore would be weak. Consequently, we held a paid position in US front-end rates (2y1y IRS) and received exposures in KRW (1y1y IRS) and NZD (2y1y IRS). 

In March, we argued that strength in USD/HKD would likely lead to a tightening of liquidity conditions onshore in Hong Kong and we entered a paid position (1y IRS). We also held a very bearish view on Indonesian bonds (INDOGB’s) but we did not express this in the portfolio as it’s problematic to short. We have maintained our now deeply in-the-money USD and NZD exposures and we remain bearish INDOGB’s.

Last updated: 20 July 2018

Commodities

Gold

Early in 2018, we believed that rising US interest rates should weigh on the value of gold. While gold was resilient through Q1, it came under sustained selling pressure in Q2. Although concerns around global growth prospects and geopolitical tensions have risen in 2018, these have provided gold with little support and we expect gold to weaken further in the near-term with our 12-month forecast at US$1,150/oz.

Iron ore

Chinese credit policy is likely to remain firm despite easing monetary conditions, which points to steel production softening through H2 2018 and into 2019. Meanwhile, inventory levels in China appear adequate and port inventory elevated while global ore supply is expanding amid a generalised lift in the USD. We see scope for iron ore prices to soften towards US$50/MT.

Dairy

Sentiment in the dairy sector was strong as we entered 2018 and Fonterra set initial guidance for the farmgate milk price at NZ$7.00/kgMS, but we had expected skim milk prices to remain depressed and the milk fat premiums in anhydrous milk fat, butter and cheese to compress. Consistent with our view, dairy prices have fallen persistently and our own milk price estimate is well below Fonterra's guidance.

Last updated: 20 July 2018