Risk sentiment was buoyed in Q4 on signs of a stabilisation in global growth, expectations that a US/China trade deal was increasingly likely and signals of fiscal stimulus in a number of markets. At the start of the quarter, the US Federal Reserve (the Fed) was sufficiently concerned about the global growth and inflation backdrop to cut the fed funds rate for the third time in 2019 to a target range of 1.5-1.75%. What caught the eye of investors was Chairman Powell’s view that the Fed would need to see a “significant” move higher in inflation before it would consider raising rates in the future. As with the european Central Bank and Bank of Japan, it is clear that the major central banks are now signalling lower-for-even-longer policy rates as they try to reflate their respective economies. The US dollar weakened during the quarter, on a trade weighted basis declining to its lowest levels since June.

Among developed market currencies, we increased our overweight position in EUR versus USD. We also added an overweight to JPY versus USD in December. In terms of emerging market FUND COMMENTARY currencies, we booked profits on our exposure to the Brazilian real, and maintained our Indonesian rupiah position versus USD. We also added an exposure to the Russian ruble versus USD in December, which brought the overall underweight position in USD to 8%. Given the US dollar’s weakness during the quarter, all of these underweight positions added value to the portfolio.

Following the volatile, downbeat market environment which characterised the last quarter of 2018, the view sharply reversed in January when US Fed Chairman Powell signalled a policy pivot that the Fed’s pattern of interest rate increases was no longer on autopilot but now more data dependent, and the Fed subsequently cut rates three times during 2019 in response to concerns about slowing growth. Given the relative strength of the US economy early in the period versus the other developed markets, the dollar performed relatively well versus most G10 currencies, although the Fed’s H2 rate cuts, and the sense that the period of US relative outperformance was waning, led to a falling USD during Q4. For the full year, the US dollar was a median performer outperforming most European currencies including the euro, but underperforming CAD and GBP.

At the beginning of the period we held a short JPY/ long USD position, which was closed in January. We also opened a long JPY/short USD position in December. After closing a modest preference for EUR versus USD in April, we reopened the position again in June, and increased the size of the position during Q4. For the year overall, the euro positioning was an important source of added value. We held a basket of several emerging market currencies (periodically consisting of BRL, IDR & RUB) during the year. While the IDR and RUB positions added value, the BRL was a modest detractor. We maintained a neutral position in CNY via a hedged position in CNH, and this position had a negative impact over the period.