Last Friday marked one year since Switzerland decided to scrap its currency cap, a decision that alarmed even those investors who have nothing to do with foreign exchange.
Twelve months on, and forex moves have become even more X-rated. Not in isolation – the franc’s 30 per cent rise in one day is hard to beat – but in their variety, frequency, and, crucially, their relevance to advisers.
The Chinese renminbi is the focal point at the moment, its every movement guiding Asian and therefore Western markets. The dollar story and attendant weakness in emerging market currencies is well known. Sterling’s recent nose-dive, by contrast, seems to have fallen under the radar a little.
The pound is almost 8 per cent lower against the dollar in the past six months alone, and sits at a five-year low. Worsening economic data, and forecasts pushing a UK rate hike back still further, mean it’s no longer holding up against other currencies, either.
Anyone playing Japanese or European quantitative easing via hedged share classes will be feeling the pain, for example – not helped by the yen’s safe haven surge and the European Central Bank’s apparent reticence to commit to more easing.
In bond markets, meanwhile, uncertainty over the outcome of the nation’s forthcoming vote on EU membership is already dissuading companies from issuing sterling-denominated debt.
For equities the picture is more complex. Importers won’t be pleased, but on the face of it, weaker sterling is good news for much of the UK market. Around 20 per cent of the FTSE 100 report earnings in dollars, and around 40 per cent of its dividends are dollar-denominated. This means an artificial boost to payouts.
But as Investment Adviser highlighted last month, this creates a poser in some cases. Many of these dollar-focused companies are found in the resources sector – Shell being the most obvious example – or, in the cases of HSBC and Standard Chartered, are heavily exposed to emerging markets. Not the easiest businesses to back in the current environment.
This could mean it’s exactly the right time to invest, of course, and sterling’s weakness could be just the kind of incentive that’s required to do so.
Plenty would dismiss these fluctuations as short-term moves that are impossible to predict. But as the effects of radical monetary policy continue to play out, I’d argue we’re still very much in the phase where investors should pay attention to foreign exchange moves.
Though it’s not exactly an era of currency wars, I’m reminded of Tilney Bestinvest’s assertion at the end of 2014 that currency, not sector allocations, would dictate returns last year. With sterling’s slump added to the mix in 2016, we may be in for a similar scenario in the coming months.
Dan Jones is editor of Investment Adviser