Currency Quarterly Q2 2025 | Insight Investment

Summary

Markets remain focused on the implications of recent policy volatility for the trajectory of the US economy and asset performance. Concurrently, confidence in US 'exceptionalism' has waned and support for the USD has weakened; the latter driven by concerns over reduced foreign capital inflows and increased hedging of long USD exposures. We anticipate further USD depreciation in the second half of 2025 and have positioned accordingly. Our USD short is, however modest, as we expect the decline to be slow and noisy and look for better values to add to it.

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

The Alpha view

Given the uncertainty around the policy outlook and extended USD short positioning, our macro exposure is limited. We have a modest USD short, with a bias to add to this on rallies.

The Alt Risk Premia model also holds a short USD exposure driven by Quality and Value – Carry, Momentum and Volatility are only partially offsetting the positive USD exposure. Elsewhere, our model favours longs in EUR, JPY, NOK, and AUD versus shorts in CAD, SEK, CHF, GBP, and NZD. The overall portfolio (Figure 1) is short USD, but with a moderate beta.

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, as well as an additional five risk premia – Carry, Momentum, Volatility, Value, and Quality.

Figure 1: Insight currency absolute return exposure

Source: Insight. Data as of June 20, 2025. Note: dark green dot shows aggregate position.

Longer-term valuation overview

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

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

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

Source: Insight. Data as of June 20, 2025.