The term ‘currency war’ has come to the fore in recent years. In September 2010 the Brazilian finance minister, Guido Mantega, coined the phrase when accusing wealthy nations of devaluing currencies to improve export levels and make their economies more competitive.
While this trend temporarily fizzled out in 2011, by the start of 2013 fears of a renewed currency war resumed when Japan announced plans to launch an open-ended bond-buying programme. The Japanese stock market benefited heavily from a weakening home currency as the falling yen prompted a huge boom for export-driven automobile and electronics firms.
With analysts again dreading retaliatory action and an eventual decline in international trade, statements in February from the G7 and G20 groups sought to quell fears that nations would be drawn into a spiral of competitive devaluation. Only time will tell if the efforts of the world’s leading economies were in vain, though. For currency investors, volatile times come with a silver lining in the form of potential money-spinning opportunities.
Peter Panholzer, managing partner of DynexCorp, the currency alpha manager, recalls similar global inflationary imbalances in the 1970s and ’80s when traders sought to profit from currency volatility after the Bretton Woods system – a global monetary agreement – was abandoned.
“In 2013 and beyond, currency ETFs [exchange-traded funds] and currency alpha managers, who largely rely on following pronounced price trends, are likely to be the beneficiaries of this impending increased volatility created through ‘currency wars’,” he says. “A quiet market lends itself to range trading, while a volatile market lends itself to trend following. The latter has historically returned the largest profits.”
All aboard
Like commodities and other alternative asset classes, the complex foreign exchange (FX) market was previously reserved for expert traders. Nowadays, however, the launch of various ETFs, together with money market funds denominated in foreign currencies, has brought the sector to the masses.
Currency ETFs are still a relatively new phenomenon, with the first being launched just seven years ago. For this reason, there is still a limited amount of providers in the market.
Table 1 lists the top-30 currency ETFs available for sale in the UK, ordered according to market price during the past year. (Performance data from the KSM vehicles is currently not available.)
According to Morningstar there are just three currency ETF providers on the UK market, although between them they offer 148 different products. As is clear from the data, returns vary greatly and both the winners and losers of the past year were primarily affected by either going short or long on the Japanese yen.
