Conscious Currency™: helping to meet the challenge of currency market risk
actually discussed it’s often in the context of trying to construct a general market view for the prospects for the investor’s home currency against the aggregate of other currencies. This is, of course, an active forecasting exercise.
Most often, though, the conversation about currency falls into two categories:
• Should I hedge my currency risk? • Should I hire an active currency manager?
I believe that addressing the currency question in this way misses the point and leads investors to think about not only their currency but their whole portfolio exposure decision-making in a sub-optimal way. Instead I would propose a different approach that we at Russell describe as Conscious CurrencyTM
about hedging it away – maybe moving to a 50 percent hedged position to minimize regret.” This approach can be described in a simple chart (see Fig 1). A picture like this will appear in many standard investment textbooks and in presentations prepared by investment consultants and advisors discussing currency risk with their clients.
.
To explain why I believe the current approach is less than ideal, and why I think the new approach is clearer and better, we need to look at the assumptions embedded in the standard approach to making hedging decisions. We can then try to understand the ways that currency is embedded in the tools we use today. Finally, we can discuss the basic decision that an investor needs to make, along with how that can be embedded in their portfolio structure decision- making process and, more importantly, in their portfolio.
What we assume today The standard approach to thinking about currency risk today can be summarized as follows:
“Currency movements are random, and all come out in the wash. Because I’m a long- term investor I’ll only need to worry about currency risk at extremely high levels of total portfolio exposure. As my investment time horizon shrinks, the level of currency risk that I can tolerate drops. If I’m a very short-term investor I might worry about having approximately 20 percent exposure to currency risk. If the amount of currency risk that I have is high enough to make me worry, I’ll think
24 Currency Investor | Autumn 2011 Fig 1 - For illustrative purposes only
Now the nice thing about this chart is that it provides a clear and simple approach to understanding the currency hedging question. Unfortunately this clear and simple approach turns out not to be very helpful. The standard approach depends upon two basic problems which we need to look at.
7KH ÀUVW VHHPV D OLWWOH HPEDUUDVVLQJ EXW LV WUXH nonetheless: there are effectively no long-term investors in currency market terms. The trends that we see in the currency markets (see Fig 2) can last for D ORQJ WLPH DQG FDQ EH VLJQLÀFDQW 7KHUH DUH YHU\ IHZ
Fig 2 - USDCAD Currency U.S./CAD Exchange Rate
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92