The changing fortunes of global currencies

By Clive Hale, director, FundCalibre

Added 19th October 2016

Whilst we were all eagerly hoping to get a new polymer £5 note in our change from the supermarket a couple of weeks ago, another currency was also also making a 'first' appearance of sorts: the Chinese yuan was added to the global reserve basket.

The changing fortunes of global currencies

When the IMF officially included it in the currency basket for its Special Drawing Rights, it became the first emerging market currency to win the honour. The basket weighting of both sterling and the euro were decreased to make room for it, sitting alongside the dollar and the yen.

In some ways, I think this change in status for the currencies in question reflects very well the state of play today. Sterling has fallen almost 20% against the dollar and 10% against the euro since the EU referendum*. The euro is pretty flat, whilst the dollar and the yen have remained strong (much to the horror of the Bank of Japan).

Sterling's flash crash

Carney has asked the IMF to look into the sterling 'flash crash' last week, which will come to nought but it makes him look like he is 'doing something'. But in all honesty, sterling could weaken further and the chartists amongst you will know that there is no technical support until it reaches the all time low of 1.05 - which was back in 1985 and which I remember well. You couldn’t move in London for Americans on holiday!

Speaking of the Americans, there is a new correlation in town: Trump's standing in the polls is almost perfectly inversely correlated with the Mexican peso.

Up or down for the greenback?

Whilst it is 'easy' to forecast the impact on the peso should Trump win, it is harder to ascertain what may happen to the US dollar. If Clinton won, we would have a status quo and historically, a stronger dollar has resulted with a Democrat rather than a Republican win, but - dare I say it? - a Trump win may not hit the US dollar as hard as you might initially suspect. And even if it did, a fall in the value of the greenback would give the Fed the perfect excuse to raise interest rates again finally.

It's been almost a year since Yellen and co increased rates for the first time and a second rise is long overdue. The jobs data was weak enough to potentially keep things on hold again in December, but we have a lot more data to come before then and the probability of a rate rise currently stands at 75%. Forecasts have been known to be wrong in the past, though…

Yearning for a weaker yen

Despite trying every trick in the book to make the yen more competitive, the opposite has resulted in Japan, much to the frustration of Abe and his 'dream team'. The movements between sterling and the yen have been just as dramatic as those we have seen against the dollar, with the pound also falling around 20% against that currency*.

What now?

All of this has actually been great for UK investors in overseas funds. Not only have they benefited when overseas markets have risen, they have had the double whammy of the currency boost. But what now?

If sterling remains weak for a longer period, simply having exposure to an overseas fund could be beneficial. Funds in each area I like are Brown Advisory US Flexible Equity, Legg Mason ClearBridge US Aggressive Growth, Baillie Gifford Japanese and Schroder Tokyo.

Whichever way you look at it, I think you stand a better chance of making a profit with a decently run, actively managed fund than you do checking each and every new fiver to see if it has the much coveted - and overpriced - AA01 serial number.

*Source:, 24th June 2016 to 11th October 2016

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Clive's views are his own

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