The Federal Reserve lowered interest rates by 50 basis points on Sept. 18, and expectations abount for more rate cuts in the U.S. So, divergence grows about monetary policies getting implemented by major developed market central banks.
The Fed rate cut followed a surprise rate hike by the Bank of Japan in July. Earlier this year, central banks in Canada and England as well as the European Central Bank (ECB) pared borrowing costs. Divergence confirmed. Add to that, conventional wisdom holds that lower interest rates in the U.S. weaken the dollar. That could dent the case for currency-hedged ETFS like the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG ).
To its credit, IHDG traded higher the day after the Fed announced its first rate cut in four years. Tthat might not be indication of traders’ expectations of dollar strength. But it could be a sign they believe the greenback will be stable over the near- to medium-term while maintaining advantages over the currencies of some of the countries represented in IHDG.
IHDG Could Be Interesting
The $2.79 billion IHDG provides exposure to stocks hailing from about 20 major developed markets, excluding the U.S. and Canada. So Bank of Canada (BOC) policy isn’t directly relevant to this ETF’s outcomes. But because it’s hedging dollar exposure to other currencies, Fed action is pertinent.
So is the notion of dollar stability, particularly against the British pound and the euro. That’s because U.K. and eurozone equities combine for over half of the IHDG roster. Alone, the U.K. is the ETF’s largest geographic exposure, at 18.34%.
“More recently, unequal and uncertain central bank policy ‘normalization’ has complicated this dynamic: the BoC, ECB and BoE all began their cutting cycles earlier this year with varying intensity; the BoJ continues to hike, eager to keep rates positive without crushing inflation; and the path of future Fed cuts remains dependent on incoming economic data (the September ‘dot plot’ shows the Fed cutting by about 100 bps total this year, while the future’s market is pricing in a more dovish 125 bps),” noted Jack Manley, global market strategist at J.P. Morgan Asset Management.
More Near-Term Euro, Pound Upside May Be 'Challenging'
There’s another point that’s relevant to IHDG investors. Manley added that rate differentials had likely been priced into the dollar. That implies more near-term upside for the euro and pound could be “challenging” and that the Japanese yen’s recent rally “might be tapped out.” Japanese stocks account for 14.20% of the IHDG portfolio.
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