Although, ETF Securities says that the majority of their fund flows still focus on the major currencies of Sterling, Euro, Dollar and Yen, currency has also had a significant impact for those investing in emerging markets. For example, in dollar terms the MSCI Brazil has fallen 34.15% since the start of the year. In local currency terms it has fallen just 6.15%. A significant part of the decision on whether emerging markets look like a good investment from here is a decision on whether the currencies have bottomed out relative to the dollar.
The difficulty for investors is taking a view on the direction of currency. After all, who could have predicted the unwinding of the Swiss currency peg? Currencies can be volatile, with markets dominated by relatively short-term macro-economic considerations.
Nevertheless, currency forecasts are increasingly part and parcel of economic forecasts and investors, as with other asset classes, must balance competing expert advice. Equally, Lansing argues that currencies may not be as volatile as their reputation suggests. Certainly, there will always be volatility around specific events, such as central bank announcements, but long-term trends may be more sustainable and predictable.
There are also a greater number of options available to investors who want to hedge currency or trade tactically: ETFs are an option, alongside derivatives and spread-betting.
As it is, having a view on currency may become a necessity. If the US starts to normalise rates and monetary policy continues to diverge, it is likely to create further volatility in currency. Investors will need to have a position on currency to ensure that it does not exert a disproportionate or unwanted effect on returns.
