The currency volatility is expected to remain high in the near term, says Paul Mackel, director, currency strategy – global markets, HSBC Bank Plc (Corporate Investment Banking and Markets), in an exclusive interview with Personal Money.

Recently, the currency market has been facing exceptionally huge currency swings from day to day. “This is a global issue and largely due to the relatively defensive environment where the outlook for growth and equity markets are still very disappointing, concerns about deflationary environment, falling global trade and/or rising unemployment,” says Mackel. He also observes that speculative activities have been reduced in terms of size (volume), as it is difficult for speculators to trade in any meaningful size when the market is so volatile.

For global investors, whether with a short- or long-term investment timeframe, it is best to keep on top of the market. You can do this by looking at factors that can lead to changes in the exchange-rate markets, and playing a proactive role in positioning your portfolio to benefit from the fluctuations, says Mackel. “Your day-to-day monitoring has to be greater and you must be much more defensive than ever before.” While diversifying your investments by countries and regions can help reduce the overall effects of currency risk, Mackel thinks that it would be limited by the uncertainty in the outlook for different countries and the varied moves of policymakers. Instead, you can use forwards and options to hedge your portfolio, if you have access to these instruments, says Mackel. “Otherwise, you can gear your portfolio towards more liquid exchange rates, an example is the euro.”

Since the beginning of the year, the USD has been holding well against the euro and pound sterling. But, the winds of change are blowing and some are of the view that the flight towards the USD is starting to ease. Mackel believes that the USD versus euro will be lower over the next six months. He views that there will be a correction of euro versus USD and his default expectation is 1.50 by the end of the year. “This is due to the belief that a break-up of the European Monetary Union is very unlikely, as the markets are backing away from the ‘story’.” Last week, major Asian currencies strengthened against the USD, but Mackel thinks this is temporary. “Our overall view remains intact – that the USD will continue to trend slightly higher against Asian currencies throughout the year,” he explains. 

The situation has also compelled investors to look at gold and precious metals as safer investment vehicles for the time being, he adds. “Currently, one source of concern for the currency market is the adoption of unconventional policy [such as central bankers buying financial assets to push down long-term interest rates]. Ultimately, it means that the paper value of currencies is going to fall. This is what happened in the 1930s when the UK and the US devalued their currencies against gold.”

In the next six months, Mackel expects the central bankers to continue embarking on unconventional easing policies. “There can also be competitive currency moves among countries because weaker currency can help them in the current climate.”