Which currency to bet on?

Tue, 20 Jul Pre-Open

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Even someone in your neighborhood may offer an opinion on currencies these days. After all, the distress in the US and European economies has been the toast of media discussions for months now. And their fate has been decided by economists and experts around the globe. So it would be commonplace to have novices take a call on the impact of currency movements.

But for serious investors the same poses a challenge. Investors need to now reassess their assumptions. Over the past several months economies from the PIIGS stable grabbed headlines. Rating agencies were busy downgrading their sovereign ratings. Greece even earned the distinction of 'junk rating'. So much so that the problems in the US almost became a distant past. The fate of the Euro was almost sealed. However, the doomsayers of the Euro have had a reality check in recent days. The Euro has jumped about 9.5% from the four-year lows to which it fell back in May.

The concerns over the US economy are once again showing up. Nothing less than the opinion cited by Warren Buffett himself re-asserts that. The legendry investor reportedly said “The US economy has recovered only by 40% to 50%. And it still has a long way to go.” Thus the distress of US dollar that was masked by the worries over the Euro is now being unveiled.

Those who chose to ignore the fate of the Asian currencies also failed miserably in their currency predictions. Economies like China and India may be growing at stellar rates. But few can deny the gravity of their economic woes. China is battling a real estate bubble like never before. India is risking political fallout due the problems of inflation and fiscal deficit. Thus even the best performing economies are sporting the most unpredictable currency movements. Interest rates are adding that extra flavour to this puzzle.

The direction of global trade has gone through a sea of change. The biggest importer (US) is shy of borrowing and buying. The biggest exporter (China) is doing it best to consume locally. The composition of their reserves also have a say in currency movements.

In the midst of this companies that need to hedge their foreign currency revenues are having a tough time. They witnessed unpredictable currency movements over the past two years. And this time they do not wish to take a chance. But are meeting with little success in their hedging strategies. Export oriented sectors like textile, pharma and IT consider this as the biggest woe.

Thus, currency movements may remain largely unpredictable for a while. Investors will have to do more than keeping a watch on economic variables to use this situation to their advantage.