Australia

We extracted the key factors driving currency returns; these variables approximate the dollar, EM spreads, and commodities. Any currency's sensitivity to these factors can be estimated, offering a great degree of flexibility for investors to generate trade ideas. Based on our macro views, this approach recommends being short commodity currencies and being long the dollar. The BoJ, BoE, and Riksbank are also covered.

In August, the model outperformed the S&P 500 and global equities in both USD and local-currency terms. For September, the model increased its allocation to cash and trimmed its exposure to equities.

Commercial real estate and REITs have benefited greatly from accommodative monetary policy. Though they are approaching a peak, our analysis shows that they remain in a "goldilocks" scenario and still offer plenty of upside.

U.S. inflationary forces remain tame, forcing the Fed to maintain an easy bias. Yet, the global economy is improving. This confluence could weigh on the dollar and boost commodity currencies. The NZD has more upside, but it will lag petro currencies. The BoJ will act, but timing is uncertain. Keep a negative bias toward the yen. CAD/NOK has more downside.

While the BoE and the Fed are increasingly committed to letting inflation expectations rise, the BoJ disappointed once again. The dollar and the pound are likely to experience broad weaknesses, while gold, the euro and commodity currencies have upside. USD/ZAR will fall further in the short term, but the cyclical bull-market is not over.

In July, the model outperformed both global equities and the S&P 500 in local-currency terms, while underperforming in U.S. dollar terms. For the monthly of August, the model made no changes to overall risk exposure.

The U.S. and the global economies are improving. A synchronized upswing normally trumps the Fed in determining the path for the dollar. U.S. inflation expectations are likely to rise relative to the rest of the world, weighing on the dollar. The risks for EUR/USD have risen. We are hedging our long EUR/USD position by shorting the euro on some crosses. Buy CHF/JPY.

Using long-term real rates, Uncovered Interest Rate Parity still works for exchange rate determination. Currencies are also affected by the global risk appetite and commodity prices. Intermediate-term fundamentals for EUR/USD are pointing up, but the timing is not optimal to buy it yet. However, the long-term outlook for the euro remains poor. Currently, USD/JPY has room to rally in the short term. Long-term factors will also continue to weigh on the yen.

Refiners will reduce run rates over the next month or so to clear unintended inventory accumulation, but it's not like they've never had to deal with this situation.

Over the past 12 months, the yen surged, powered by global deflationary fears. Japanese monetary conditions massively tightened, causing additional yen strength, creating a vicious circle. Policymakers will respond, but markets are likely to be disappointed. Nonetheless, global factors could temporarily move against the yen. Buy NOK/JPY and AUD/JPY. The BoE will move next month. The BoC will stand pat for the foreseeable future.