Читать книгу The Foreign Exchange Matrix - Barbara Rockefeller - Страница 4

As you will undoubtedly gather from reading the introduction to this book, foreign exchange is a complex topic. It is complex in the number of factors that impact currency valuation, it is complex in the relative weighting of these factors and it is complex in the timing of these factors. Barbara Rockefeller and Vicki Schmelzer have done a masterful job of making sense of a market that some of the best and brightest have regarded as enigmatic if not utterly incomprehensible. Much of this scepticism is driven by what the authors refer to as the perverseness of markets – the habit of currency prices to respond contrary to what fundamental analysis would suggest. Further scepticism is caused by the perceived absence of financial market theory to explain currency valuation. Additional scepticism comes from the poor track record of many market professionals in managing foreign exchange risk – some infamously. The default view is that foreign exchange markets are random and that one should hedge away any underlying currency exposure and focus on the business at hand, whether that is investing in global equities or fixed income or managing a profitable multinational corporation.

Currency hedging is very common in global markets, but it is by no means ubiquitous. The rule of thumb is that global bond investors hedge on average 80% of their foreign exchange exposure, while global equity investors hedge on average only 20% of their exposure. Much of this is due to the positive correlation between equity market performance and appreciation of the local currency. The accepted explanation is that equity markets rally during periods of relative economic strength that are accompanied by rising inflation and interest rates. The combination of these factors attracts foreign investment into the country, which lifts the value of the local currency. Furthermore, currency hedging is more common in developed markets than in emerging markets, owing to the lack of an organised futures market in many developing countries that is needed for hedging. While some players have attempted to solve this problem through proxy hedging, their track record is not particularly encouraging. Moreover, proxy hedging tends to be more expensive than many assume, particularly in the longer term. Slippage in economic and policy variables, such as inflation or interest rate differentials, ensures that no currency is a perfect proxy for another. However, as foreign exchange exposure has grown with the globalisation of asset management over the past 30 years, there has been an increasing interest in understanding currency markets. While some portfolio managers attempt to beat their benchmarks by creating alpha from actively managing foreign exchange risk, an increasing number are even trading currency as an asset class.

The absence of a widely accepted economic model for foreign exchange valuation does not imply that currencies are random any more than equity or fixed income securities are random. As in other asset classes, currency prices are driven by supply and demand. So, we should revert to the balance of payments to determine the net inflow or outflow of trade and investment. Ideally, net trade and investment flows (or what economists refer to as the broad basic balance) should be used to explain real effective exchange rate rather than spot exchange rates. Why? The value of a currency is more than simply its relative value to the US dollar or euro. Rather, it is the trade-weighted average of a given currency with its trade and investment partners. Moreover, no two countries have exactly the same level of inflation every year over the indefinite future. Consequently, we need to work with real rather than nominal exchange rates, as inflation is corrosive to the value of a currency as demonstrated by the law of one price and the theory of purchasing power parity. While this approach is relatively uncontested, it falls short of fully explaining currency price movements. Currencies are not fully floating (determined by market supply and demand), but are often subject to intervention or even active management to limit a currency’s movement over time.

There are as many foreign exchange regimes as there are countries, with only a handful truly fully floating. While major currencies such as the Japanese yen and the Swiss franc have been subject to intervention and price management recently, even the euro and US dollar have experienced market intervention over the past ten years. The reason is two-fold: first, central banks covet orderly market conditions; and second, governments prefer stable currencies to avoid threats to growth that accompany large currency movements. For these reasons, it is very difficult to use fundamental analysis to forecast foreign exchange prices. Just when a strong, fundamentally-driven currency trend is unfolding, the local authorities are most likely step in to stop it. Market intervention by the Swiss National Bank several years ago to arrest the Swiss franc’s appreciation against the euro is a good example. Rather than it being driven by speculators, as suggested by SNB officials, it was largely due to the Swiss franc’s safe-haven status amidst crisis-ridden Europe. Once you have controlled for all of these variables, you need to acknowledge the size of the interbank market and the large amount of cash it is able to move on a speculative basis. Trading for short-term profit in foreign exchange makes fundamental analysis useful only in the longer term. As the authors of this book point out, technical analysis is an indispensable tool of the foreign exchange trader.

The Foreign Exchange Matrix fills an important need in the market today regarding currency valuation and trading. With more than 50 years of foreign exchange market experience between them, Rockefeller and Schmelzer boldly go where few have dared. While they flatly admit to a lack of an elegantly simplistic theory to currency valuation, what they provide is a vigorous and comprehensive examination of the factors that weigh on foreign exchange markets. What the reader comes away with is not only a better understanding of what moves currency prices, but a better understanding of global markets and the interconnectedness of the world we live in. The historical anecdotes alone are worth the effort of reading this book, as the authors move effortlessly from the Asian Financial Crisis to the LTCM Crisis to the Lehman Crisis with deft and skill. While the reader may not decide to quit their day job to day trade foreign exchange spot, forward and option markets, they will have a greater understanding of what factors drive currency prices and a greater degree of comfort in managing foreign exchange exposure – whether that exposure is by default or design.

Michael J. Woolfolk, PhD

Managing Director and Senior Currency Strategist, Bank of New York Mellon, New York, NY, December 2012