Asian currencies are back in the spotlight, particularly the Japanese yen and the Chinese yuan, which is bringing currency volatility to the forefront of global investors’ minds.
On Thursday, the yen slipped to its lowest level since 1990 — ¥153 against the dollar. Meanwhile, China has been ramping up support for the yuan with a record fixing.
Amid Tokyo’s now familiar verbal warnings about excessive declines this week, and Beijing’s efforts to support its country’s currency, coupled with the backdrop of hotter-than-expected CPI in the US and dollar strength, investors face both risks and opportunities in navigating these turbulent waters.
As always, one of the most effective ways to mitigate currency risk is through portfolio diversification. Global investors should spread their investments across different asset classes, regions, and currencies.
By diversifying, they can reduce their exposure to any single currency or market, thereby cushioning the impact of currency fluctuations on their overall portfolio performance.
For those with significant exposure to currencies prone to volatility, which this year have included the yuan, hedging strategies can provide a layer of protection against adverse currency movements.
Options, forwards, and currency swaps are increasingly popular as hedging instruments that allow investors to mitigate currency risk while still participating in potential upside gains.
Despite short-term volatility, you should focus on the underlying fundamentals driving currency movements.
Economic indicators such as GDP growth, inflation rates, trade balances, and central bank policies play a crucial role in determining long-term currency trends.
For me, verbal interventions by Japanese and Chinese officials underscore underlying policy uncertainties. While attempts to stabilize currencies may provide short-term relief, they also reflect policymakers’ concerns about underlying economic vulnerabilities.
Heightened currency intervention can signal a lack of confidence in domestic economic fundamentals, raising questions about the effectiveness of monetary policy measures and the sustainability of growth trajectories.
By conducting thorough fundamental analysis with the help of an advisor, investors can make more informed decisions and position themselves for success in the long run.
Of course, the volatility in currency markets presents opportunities for savvy investors to capitalize on short-term price movements.
Traders can use technical analysis tools and trading strategies to identify entry and exit points, taking advantage of volatility to generate alpha.
However, it’s essential to exercise caution and manage risk carefully when engaging in this kind of strategy.
For investors seeking to avoid currency risk altogether, currency-neutral investments can offer a solution.
Currency-neutral funds and ETFs hedge out currency exposure, allowing investors to focus solely on the underlying assets’ performance. While currency-neutral investments may have slightly higher fees, they provide peace of mind for those concerned about currency volatility.
It’s essential for investors to maintain a long-term perspective when facing currency volatility.
While short-term fluctuations can be unsettling, focusing on long-term investment objectives and staying disciplined in the face of market turbulence is key to achieving financial success. By taking a long-term view, investors can ride out short-term volatility and capitalize on opportunities for wealth accumulation over time.
The recent volatility in Asian currencies presents both risks and opportunities for global investors. While currency volatility may be unnerving, it also creates opportunities for those willing to adapt and navigate the challenges effectively.
Nigel Green is deVere CEO and Founder
Also published on Medium.
