Your IndustrySep 1 2014

Investing in Currencies - September 2014

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Approx.50min

    Investing in Currencies - September 2014

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      CPD
      Approx.50min
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      Introduction

      By Nyree Stewart
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      Aside from the recent euro crisis, most people pay limited attention to currency except when looking at exchange rates before going on holiday.

      But in 2014, currency markets have displayed some interesting behaviour, although, as Paul Lambert, head of currency at Insight Investment, describes it, a key characteristic of the year “has not been so much the events but lack of events, in that volatility has been extremely low”.

      He adds: “There has been remarkable stability in the foreign exchange market, and that’s been true in the face of some, at times, fairly significant events. One of the perplexing things has been why has the volatility been so low? Is this a steady state we should expect going forwards or are there particular reasons why it’s so low this year?”

      Given the current geopolitical uncertainty around the world, it is difficult to imagine what event could set currency markets on edge.

      Sterling has already delivered a strong performance as expectations for the UK economic recovery continue to gather pace, with Bill O’Neill from UBS Wealth Management calling it one of the strongest performers of the past 12 months.

      Ugo Lancioni, head of currency management at Neuberger Berman, notes: “Probably the UK and the US have been the economies that have been ahead of the economic cycle and provided the strongest signals to currency managers.”

      Meanwhile, monetary policy has been a key factor, with the European Central Bank implementing policies, having highlighted the strength of the euro as one cause of deflationary pressure earlier this year. Elsewhere, in the US tapering is expected to end in October, and the Bank of Japan is continuing with its quantitative easing programme, which Mr Lancioni says “has allowed the yen to remain weak in spite of the fact the yen is – from a longer-term valuation perspective – very cheap; it is probably the cheapest currency out there”.

      Looking ahead Mr Lambert notes that once “we get beyond tapering” it will be difficult for central banks to dampen market enthusiasm and things expected in the first half, such as rising yields and a rising dollar, are “likely to occur in the second half of the year [or the] first quarter of next year”.

      Geopolitical risk does remain a concern, however, as an escalation in the Middle East or Ukraine, and a resulting spike in oil prices, could have a major impact.

      “You wouldn’t see the rise in yields, the trend in dollar,” explains Mr Lambert. “You would still see a rise in volatility but of a different kind; a rapid float to quality. You’ll see risky currencies, especially those with significant current account funding, suffer. Countries with a current account surplus could do well in such an environment and you could see sharp movements in currency markets if we went down that bleak path.

      “One way or another we should see increased volatility and increased action in the currency markets,” he adds.

      Nyree Stewart is features editor at Investment Adviser

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