Currency war? What war?
Two-thirds of respondents to this month’s Off The Record survey do not believe there was a genuine ‘currency war’ on, with about half of these believing it to be all media hype.
A Swiss fund commented: “I do not think that there is a war, it is just a ‘trying-to-survive-with-value’ battle of the euro and the dollar. European minor currencies from northern countries are stronger.”
An Icelandic fund did think there was a currency war “in the respect that most of the major countries and a lot of minnows also are trying to depreciate their currencies in order to export themselves out of crisis.”
A Dutch fund added: “It is starting to look like a currency war, but if it continues, it will also impact their own country with all kinds of unwanted aspects.”
Asked to rank four currencies on their strength or weakness against a trade-weighted basket for 2013, the consensus was that the euro and the US dollar would be strong and sterling and the Japanese yen would be weak. The euro marginally beat the dollar in the vote for strength, and the yen marginally beat the pound for weakness.
Six respondents stated that 0-10% of their fund’s assets were denominated in foreign currencies, while four had 21-30%, five had 31-40%, and two had 41-50%. Only five respondents had above 60% to assets denominated in foreign currencies.
Some 69% of respondents hedged some of their FX risk, while 9% hedged it all, and 22% did not hedge any. A Spanish fund felt that FX hedging currently still made sense: “In the current environment, FX is driven mainly by central banks, so it is worth hedging”. A Dutch fund was more cautious: “[The] FX risk of developed countries is not rewarded long term. FX of emerging markets will continue to be rewarded.” A UK fund simply felt it to be “too risky and expensive”.
Only two respondents invested in currency alpha strategies. “Currency is a zero-sum game and thus, in the long run, there is no such thing as a alpha strategy. In the short run, it is possible to make money on currency speculation, but almost everybody becomes a loser over time on currency speculation,” stated a Danish fund.
Asked whether the current environment made active currency management more or less attractive, those who had an opinion were split almost down the middle on the question.
“Not sure,” said one Icelandic fund. “It is politically motivated and therefore difficult to implement in a rational way.”
Indeed, asked to rank the attractiveness of a range of asset classes “in the context of today’s currency depreciations”, the most negative consensus was reserved for currency alpha strategies. Perhaps surprisingly, inflation-linked bonds and unhedged foreign assets in general were also ranked low.
The most attractive assets were considered to be global infrastructure and real assets in general, and emerging market local-currency debt.
In written responses, many chose equities – and some rejected the validity of the question, noting that every currency depreciation was against another currency’s appreciation, or citing hedging and diversification. A Swiss fund said: “There is no best asset class, as currency is always concerned when we buy or sell something against a price. Continue diversification.”