Investors Review Currency Hedging
Relative currency valuations are moving and moving fast. Driven by multi-speed monetary policy globally, investors are preparing to hedge currencies.
Currency research has boomed in our feeds. There are so many dynamics at play and parity levels are being reached. Key themes being researched include the the strength and weaknesses of the major trading block currency pairs, including the Yen, Euro, Sterling and the current currency champion, the all dominant U.S. Dollar.
With monetary policy driven rate hikes moving at different speeds across the zones, as Central Bankers accept they have been behind the curve, currency valuations are moving, and moving fast. Which in turn will have a second derivative impact on domestic (imported) inflation, and the manageability of a soft landing. The impact across the entire Institutional portfolio cannot be ignored.
FX trends are impacting asset classes.
Against the US dollar, the Japanese yen is at a 24-year low. Over the same period, the domestic purchasing power of the dollar has almost halved, whilst that of the yen has barely moved.
Many Are Still Sceptics
Institutional Investors were not the first movers into crypto. But their scepticism has been helped by the evolving crypto market. Just not entirely.
As the market for cryptocurrencies has increased in size and liquidity, investing in the crypto market has become feasible for even the largest institutional investors.
But what percentage of Crypto do institutions own today? Who owns it and why? Has crypto evolved into an asset class with an expected return, diversifying features and a store of value?
Or has the recent collapse of the stablecoin UST and the associated crypto token LUNA tempered interest? Institutional Investors are revisiting the properties of Crypto for inclusion in their portfolios, using future Central Bank Digital Currencies (CBDC's) as a benchmark. And assessing the wider opportunities that distributed ledger, smart contracts and tokenisation presents.
The market cap of cryptocurrencies peaked in late-2021 at $3.0 tn and has since plummeted to around $1.3 tn. The primary catalyst for this decline has been an increasingly hawkish Fed with financial conditions tightening by the most since the global financial crisis. The drying up of liquidity has negatively impacted all risk assets, but with an especially pronounced impact on crypto.
Currency Overlay Time
Currency markets are gaining importance as changes in relative values impact asset classes across the globe. It may be time for a Currency Overlay.
There are several global themes impacting currency markets that are raising currency policy questions at European Professional Investors Investment Committee meetings.
From the start of the COVID crisis the USD benefitted from its de facto dominance as the world's reserve currency and its undisputed safe haven status. Roll forward to 2022 the greenback has risen to levels not seen since the 1990's or March 2020, supported by the relatively early and more hawkish FED versus other central banks in developed markets.
In contrast, other Developed and Emerging Market currencies have sold off, and not just the Euro and the Renminbi. The Norwegian Krone, Australian Dollar, South African Rand and the Chilean Peso can be added to the list.
Behind the monetary policy diversion story is the question, who will benefit or suffer in the short term scramble for commodities, and the long term shift away from fossil fuels. And more importantly, is it time to put a currency overlay in place, either as a hedge, or an alpha generation source?
Is De-Dollarisation Happening
Will the USD continue it's dominance of global FX markets or can we expect some countries to embark on de-dollarisation by diversifying into Renminbi.
Has The US Dollar Reached Peak Privilege?
With the blocking of Russia's USD reserves and exclusion from SWIFT, the USD has arguably been used as a weapon of mass economic destruction by the American Government.
But in FX markets, every action typically has an equal and opposite reaction.
When it comes to the use of the USD as a means of geopolitical control, the question on investors minds now is whether de-dollarisation will be accelerated by countries who wish to free themselves of these now explicit controls.
And in particular, will the renminbi start to slowly erode the dollar's dominance in world trade.
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