February was wrought with valuation fluctuations in both the U.S. and overseas. In the past six months, turmoil has riddled the ruble; the euro declined to a nine-year low; the franc dropped its euro cap; and the yen slid downward, while the dollar crept upward. In the last month many asset management firms addressed the investing implications of currency changes, but here we highlight five standout articles discussing currency volatility:
1. MFS: Investment Insight: Surprise from Switzerland (Protected advisor site content) – Assesses the long-term risks and pervasive effects of the SNB’s decision to revoke the franc’s currency peg to the euro. The article states that the Swiss currency swing may have adverse effects on investor perceptions. Translational effects may be detrimental to domestic investors, however foreign investors that utilize the EUR or USD could see a rise in their share prices. MFS believes that transactional outcomes will be difficult to assess, however businesses with weighty Swiss costs may experience disturbances.
2. EATON VANCE: Why Global Currency Investing Still Makes Sense – Even Amid a Strong Dollar (Protected advisor site content) – Poses three reasons why global currency investing remains a rewarding practice. The first supporting point is the increased potential for frontier markets – where a strong USD can thrive. Secondly, U.S. investors can potentially take advantage of currency hedging opportunities for non-euro European tender. Thirdly, successful active management of foreign currency investing has had successful precedents, as seen in Mexico, India, and Korea.
3. PIMCO: The Swiss National Bank’s Unpleasant Experience of Sleeping Next to an Elephant Considers the possible underlying reasons for the SNB’s abrupt change in monetary policy. Firstly, the SNB may have underestimated the impact that the restructured policy would have on exchange rates. Secondly, on January 22, the ECB announced its QE program; knowing of this impending action, the SNB may have determined that upholding its minimum exchange rate policy would be too risky. Lastly, the damage control for defending the minimum exchange rate further may have been more daunting than simply adjusting the policy. Ultimately, PIMCO argues that this event can be taken as a cautionary example of unconventional monetary policy.
4. LORD ABBETT: Currencies – What to Watch for After the Swiss Surprise – Surmises that Switzerland’s departure from its euro peg was only an effort to keep its currency cheap. The article recaps the franc’s 2009 – 2011 rise and eventual peg at 1.20 to €1. In 2015, the ECB’s move toward quantitative easing meant that the peg was no longer sustainable, leading to the franc’s appreciation. At the same time, the USD appreciated rapidly during Q4 2014 and early 2015. Lord Abbett predicts that this USD trend will continue.
5. J.P. MORGAN – WorldView IQ 2015 – Dislocations: The Dollar, Europe and the Deflation Question (Protected advisor site content) – This comprehensive report takes a holistic approach towards assessing the value of foreign exchange hedging in light of recent events. The piece also summarizes the major points to the ECB’s QE program. The firm examines the pros and cons of currency hedging through simple hypothetical examples. The piece concludes that while fixed income investors will fare positively by employing currency hedging, the same may not be the case for long-term equity investors when factors such as slow U.S. growth are factored. J.P. Morgan encourages investors to consider non-Eurozone European countries, and highlights the firm’s Europe ex-EMU portfolio, with currency holdings in the UK, Switzerland, Sweden, Norway, Hungary and Poland.