Sell U.S. dollar versus these currencies, BCA says

BCA Research

BCA Research has issued a notable recommendation for investors, advocating for the sale of the U.S. dollar against a basket of specific currencies. This strategic advice is rooted in their analysis of fundamental economic shifts, particularly concerning U.S. real interest rates and the dynamics of international capital flows. The firm maintains existing long positions in the South Korean won, Japanese yen, and Taiwan dollar against the greenback, underscoring a conviction in these Asian currencies. Additionally, the Hungarian forint is held as a proxy for the euro, indicating a broader bearish stance on the dollar relative to European counterparts.

The core of BCA's argument rests on the expectation that these recommended currencies, including the euro, are bolstered by current-account surpluses. These surpluses are anticipated to act as a protective buffer, providing support as global investors potentially scale back their exposure to U.S. assets. The Chinese yuan is also expected to appreciate against the dollar, though BCA foresees potential intervention by Chinese authorities to temper these gains, which could leave the yuan weaker against other surplus currencies.

U.S. Dollar

The bearish outlook on the U.S. dollar by BCA Research is primarily predicated on the anticipated decline in U.S. "core real yields." The firm defines this metric as the inflation-protected Treasury yield, adjusted to exclude the bond term premium. BCA's analysis suggests that recent increases in U.S. yields have largely been a reflection of higher fiscal and inflation-related term premiums, rather than an indication of stronger underlying economic growth expectations. This distinction is crucial, as rising term premiums typically exert downward pressure on the dollar, whereas genuinely higher core real yields would generally be supportive.

Furthermore, the dollar's recent strength has been partially attributed to foreign purchases of U.S. equities, particularly those linked to the enthusiasm surrounding artificial intelligence. These inflows have played a significant role in financing America's substantial current-account deficit. However, BCA anticipates a deceleration in these inflows, especially if the valuations of expensive U.S. technology shares begin to soften. Should this scenario unfold, the firm posits that the dollar could become more susceptible to global growth trends, potentially declining in tandem with U.S. equities.

Current-Account Surpluses

The currencies favored by BCA Research—including the South Korean won, Japanese yen, Taiwan dollar, Singapore dollar, and euro—share a common characteristic: they are backed by current-account surpluses. This fundamental economic strength is a key pillar of BCA's recommendation, as these surpluses are expected to provide inherent support to their respective currencies. As international investors potentially reduce their holdings of U.S. assets, the demand for these surplus currencies is projected to increase, contributing to their appreciation against the dollar.

This dynamic also extends to investment strategies beyond currencies. BCA recommends an underweight position in U.S. equities, a neutral stance on emerging markets, a modest overweight in European equities, and a substantial overweight in Japanese equities. The firm also suggests that a weaker dollar would be beneficial for gold and gold-mining shares, and favors non-U.S. government bonds following any near-term market selloff. The expectation is that capital will flow out of U.S. assets and into regions and assets perceived as more stable or offering better value, particularly those with strong current-account positions.