From the European Central Bank’s expected announcement of monetary measures this week to political pressures in Japan and many other things in between, the geopolitical and economic stars are aligning to make global currencies highly vulnerable to swings.
Other central banks such the Bank of England, the Fed and the Central Bank of Russia are also facing domestic political pressure to act boldly as well as having to contend with the forces of the global financial markets.
Even the shrewdest stock and bond picking can be seriously undermined by big movements in local currencies. Corporates around the world are increasingly bemoaning currency fluctuations when they undershoot earnings projections, so fund managers with the best currency analysis supporting them are likely to be a step ahead of the competition to a higher degree than in the past.
“There is massive volatility in many currencies at the moment,” said Bambos Hambi, head of fund of funds at Standard Life Investments. He said that his team have significantly upped the proportion of their time spent focussing on currencies in order to better anticipate and deal with the increasing fluctuation being seen. “We’ve always had currency experts but now it’s a much bigger focus for us,” Hambi noted.
Europe is front and centre of this at the moment. With the euro staying stubbornly strong despite anaemic economic growth and bad employment numbers across much of the Euro area, the pressure is on the ECB and EU politicians to act dramatically with signs pointing to them yielding to that imminently.
Understanding how much and when the euro may depreciate is likely to be a big advantage and anybody caught unprepared or without sufficient hedging could see their portfolios take a major hit.
“The ECB seems determined to weaken the euro and has every possible economic justification to do so, but strong currencies in the US and UK will serve only to allow Europe to export disinflation – the low level of which is already a concern for the Fed and BOE,” said Nick Beecroft, senior analyst at Saxo Capital Markets.
Another prime example is the Japanese Yen. Hambi explained that the Japanese government has started ‘encouraging’ – in the strongest sense of the word – the highly conservative big banks and investment trusts in the country to reduce their domestic bond holdings. How fast and to what degree this happens will be a crucial read for any Japan or Asia-focused fund manager, as well as those handling global funds and multi-asset ranges.
Hambi also pointed to the Russian rouble as a major hotspot in currency markets, given the storm still brewing next door in Ukraine, Crimea’s inclusion in the federation and the associated Western sanctions.
Then, with the asset class increasingly tipped to enjoy a renaissance, there is the myriad of currencies across the rest of the emerging markets to contend with.
While redeploying analysts or hiring new ones to focus on currencies has a cost, it is likely to be orders of magnitude less than the result of bad calls on currency movements.
