Too big to ignore
Many of us are happy to own shares as part of our investment portfolio, tracking prices with our smartphones on a daily basis, yet we have never considered investing in currencies. We pore over news about companies building factories in Brazil or opening offices in Russia, but we’re as likely to take exposure to the real or the ruble as we are to buy real estate on the moon.
If you’re one of the millions for whom foreign currencies are simply for holiday spending, you may be surprised to learn that investors are flocking to the foreign exchange market in ever-increasing numbers.
A survey by the Bank of International Settlements last year found that global FX market turnover hit about $4 trillion a day, 20 percent more than in 2007. The BIS noted a ‘significant’ growth in cash or spot trading by retail investors, with daily activity attributable to households and small nonbank institutions estimated at $125 billion to $150 billion.
Once closed to all but banks and a small group of institutional investors, the FX market has been revolutionized by the Internet. Increasing access to electronic pricing and trading services has demystified currencies, attracting people to the world’s most liquid asset class and putting downward pressure on dealing costs. Through their brokers, or direct from their homes, investors can trade without fear that news affecting their holdings will break while the stock exchange is shut, or while market-makers in their bonds are tucked up in bed. FX is, indeed, a 24-hour business.
Of course, the Internet has as much power to confuse as it does to illuminate. A quick search will result in thousands of pages of advice and offers of services, many of which portray currency investment either as pure gambling or as a surefire path to easy riches. The reality is that it’s certainly not the latter, but it doesn’t have to be the former either if done in a rational and informed manner.
Not easy to influence
Like stocks, bonds and commodities, currencies move on news and analysis. Unlike stocks, which move for any number of reasons, currencies are typically influenced by macro-economics.
Because its volumes are huge and that it is not controlled by any company or exchange, the FX market is hard for anyone other than central banks to influence in a significant way. Macro-economic announcements, such as government reports on GDP growth or inflation, are released to all without favor.
While any investor can trade, we advise our customers to approach the spot market with caution and to apply a diversified medium- or long-term approach to currencies. This investment paradigm not only applies to currencies, but to any asset class in an investment portfolio for that matter.
Since every FX transaction involves a pair of currencies—e.g. from dollars to yen—it’s important to have knowledge of the economic outlook at both ends of the trade, in this case the United States and Japan. To quote an old cliché, knowledge is power.
A common complaint of spot traders is that with so many variables affecting the cost of money, it is hard to know when to buy a currency and when to sell it. For example, the US may report weak economic data that would logically make the dollar a sell, yet many investors may buy it as a safe haven due to greater concern about economies elsewhere in the world. Another economy might be growing well and, yet, face unnerving inflationary pressures, dampening demand for its currency since inflation erodes purchasing power.
For those who look beyond the short term, foreign currency deposits and structured investments can potentially deliver gains in the event of appreciation in the value of the target currency and from higher relative interest rates. HSBC, for example, provides access to FX-linked structured products that offer yield enhancement opportunities, with interest above normal time deposits, while meeting customer needs for foreign currencies. Some currency-linked products may offer capital protection in return for specified time commitments.
Perhaps one of the greatest opportunities in the FX market today comes from the Chinese renminbi, which has appreciated by 30 percent against the US dollar since 2005. As Beijing relaxes controls over the renminbi, we’ve seen significant demand for currency deposits from investors who believe, as we do, that China will sustain economic growth in excess of 8 percent yearly through 2013. Though, as with any currency, there is no guarantee of appreciation, we forecast the renminbi to rise by 3 percent to 5 percent yearly over the next few years as it becomes increasingly popular as a medium for investment and cross-border trade.
Whether you’re new to currencies or an experienced investor, the good news is that FX is one of the few ‘all-weather’ markets accessible to retail investors on a 24-hour basis. For some, this won’t be enough to persuade them to take the plunge. For others, it is clear that the opportunity is already proving too big to ignore.
(The author is senior vice president and head of retail banking and wealth management of HSBC.)
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