Currency Quarterly Q1 2025 | Insight Investment

Summary

Trade uncertainty is at its highest on record and we expect to see a knock-on reduction in global growth.

Some of the most negative impacts of the new US tariffs could be felt by the US itself. Tariffs have the potential to be stagflationary for the US economy, and such low growth and high inflation will reduce the scope for the Federal Reserve to reduce rates. Once tariff uncertainties are ‘digested’ our sense is that a more isolationist and interventionist US will ultimately reduce the appeal of the USD as a safe-haven currency. But recession fears suggest caution in playing this view. Indeed, our macro bias is to fade USD strength only after the impact of the current trade war is clearer and more ‘in the price’.

The alt risk premia model also holds a long USD exposure driven by the quality, carry, and momentum factors – volatility and value are only partially offsetting the positive USD exposure. Elsewhere, our model favors longs in JPY, NOK, and AUD versus shorts in CAD, SEK, and NZD.

The Alpha view

Our approach to generating returns in currency markets is to use a diversified set of factors that cover key short and medium-term currency drivers. These include macro themes, plus five risk premia – Carry, Momentum, Volatility, Value, and Quality.

Given the uncertainty around the policy outlook and extended USD long positioning, our macro exposure is limited. Our macro bias is to add to USD longs until the impact of the current trade war is clearer and more ‘in the price’.

The Alt Risk Premia model also holds a long USD exposure driven by the Quality, Carry, and Momentum factors – Volatility and Value are only partially offsetting the positive USD exposure. Elsewhere, our model favours longs in JPY, NOK, and AUD versus shorts in CAD, SEK, and NZD.

Figure 1: Insight Currency Absolute Return Exposure

Source: Insight. Data as at March 31, 2025. Note: dark green dot shows aggregate position.

Longer-term valuation overview

For less agile longer-term investors whose decisions lean more heavily on valuation metrics, a few points can be made:

• USD remains expensive;
• JPY, EUR, CHF and NOK look very cheap – AUD is only moderately cheap; and
• SEK, CAD, GBP, and NZD are close to fair value.

Figure 2: Local currency overvaluation (+) and undervaluation (-) versus USD

Source: Insight. Data as at March 31, 2025.