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US dollar to decline in 2016 says ETF Securities


ETP provider, ETF Securities, predicts that the US dollar will behave in a similar way as it has done in the past and begin its decline during the first quarter of 2016.

 The firm believes that this sets the scene for many other asset classes, with international equities likely to outperform US equities, sentiment towards emerging markets likely to improve and commodity prices set to rise.
James Butterfill, Head of Research and Investment Strategy at ETF Securities, says: “US official policy interest rates are going to rise. But the Federal Reserve (Fed) balance sheet has never been this vast and so most asset classes will be entering unchartered waters during this tightening cycle. ETF Securities’ analysis of previous Fed hiking cycles suggests, contrary to popular belief, that there could be a USD sell-off.”
The firm also believes that there is the risk that central banks commit policy mistakes. “If policy errors are made, inflation could return faster than nominal Treasury yields rise and the USD strength is likely to wane. ETF Securities’ gold model suggests such an environment could lead to upside surprises in gold prices. Treasuries are in a bubble but the line between treasuries as an asset class and a policy tool has never been so blurred. Changing bond market dynamics make it difficult to tell if the sell-off will be aggressive like in 1994, where yields rose by 3 per cent in 12 months, or something closer to the average rise of 1 per cent that we have seen in previous rate hiking cycles.”
Turning to commodities, the firm believes that there are early signs of supply side destruction across most commodity markets. “Recent price declines are likely to extend the already aggressive capital expenditure cuts. Supply deficits emerge approximately two years after capital expenditure growth hits a trough. The extended period of commodity oversupply is consequently close to ending. Historically low margins in the mining sector will act as a catalyst to rationalising resource extraction activity. With investor sentiment hovering at near decade lows, any shift in positioning could prompt a sharp commodity price rebound.”
ETF Securities believes that despite the rout in commodities in the last five years, commodities still warrant a place in a diversified portfolio. “ETF Securities’ analysis demonstrates that in both typical balanced and growth portfolios, a 10 per cent allocation to commodities enhances returns and reduces recovery time to the previous high, hence, fulfilling their role as a diversifier.”

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