Note Précis Sept. 18, 2020: New Is Old, Again – Currency on Watch

Note Précis Sept. 18, 2020: New Is Old, Again – Currency on Watch – New is old, again – currency markets need to be on watch. Amid massive quantitative ease since 2008, currency translation surprise has seemed a consensus afterthought in major markets. Still, capital markets cycles have invariably in the past involved abrupt changes in currency features. Now, foreign exchange translation and business pressures exit in emerging markets. For myriad reasons in majors, the Yen is now close to 105 to the U.S. dollar, the Euro pushing up to 1.18, the Renminbi close to 6.8 while sterling waxes and weaves again around Brexit risk.

Prolonged compression for administered rates was recently again underscored by the Federal Reserve, ECB, Bank of Japan, Bank of England and others. Substantive economic recovery now appears placed for 2021 by institutions like the IMF,OECD and World Bank but even then incorporates bifurcation. Not so long ago, major preoccupations and sources of surprise lay in foreign currency translation challenges in financial statements as well as contribution therefrom on revenues. They are likely to resurface. Onto political tensions this year, coincidentally but factually so, both Covid-19 pandemic and irredentist territorial claims have been compounding. Currency volatility is likely to expand, despite the central banks.

The $6.8 trillion in daily currency trading dwarfs annual global GDP of $88 trillion in 2019. It is diverse by participant and not easily tamed. We would also expect  a resurgence by participants like hedge funds in activity such as convertible arbitrage, paired trading and currency arbitrage. In a time of slow revenue growth, even minor exchange rate changes could be magnified in impact on financial statement translations. In asset mix as hedge, we would espouse precious metals exposure at overweight. Volatility in equities and fixed income is likely to be elevated, not least due to high valuation and solvency risk. Despite central bank liquidity interventions into capital markets replete with massive fiscal and monetary largesse, the case for strong balance sheets remains apt. Irrespective of geography or sector, currency translation has increased potential to bite on both financial structure and earnings delivery. StrategeInvest’s independent consultancy operates as Subodh Kumar & Associates. The views represented are those of the analyst at the date noted. They do not represent investment advice for which the reader should consult their investment and/or tax advisers. Any hyperlinks are for information only and not represented as accurate. E.o.e.