Private banks are almost neatly divided down the middle between those which encourage their clients to view FX as an asset class and those which are concerned about exposing these clients to excessive volatility.
| Interest in Asian currencies – in particular RMB bonds – has also increased|
“We don’t encourage consideration of FX as an asset class since the performance of related instruments is not stable,” says ABN Amro chief investment officer Didier Duret.
“We recommend active hedging of underlying assets should the risk of a currency decline compromise the total expected return. As an example, we are currently hedging the EUR for USD-based clients exposed to EU assets.”
He adds: “Indirectly, FX strategies can be part of the exposure we have with hedge funds that have open positions in currencies, for example commodity trading adviser or macro funds.”
Paul Bowman, head of structured solutions and FX strategy at RBC Wealth Management, takes a different view.
“We encourage clients to consider FX as an asset class and ensure that they consider the currency impact of any investment, for example when they are purchasing an overseas property or considering an investment in equities denominated outside their base currency,” he explains.
JPMorgan’s focus has been on currency hedging decisions for international exposure in equities and bonds, explains the bank’s currency strategist Alberto Boquin.
“We also have a subset of clients with shorter time horizons who implement directional views via the options space,” he says.
The head of investments at a leading US bank says his clients are recommended to focus on the investment returns arising from the asset class in which they are invested and then hedge that exposure where applicable back to their base currency.
“This ensures that the returns they are targeting are not eclipsed by an adverse movement in FX rates and makes additional sense in a market environment where the cost of purchasing such protection is low,” he says.
“On top of this, we also recommend that clients consider the use of FX as an asset class in itself and look at strategies to generate returns from such phenomenon as volatility, trend or momentum in FX rates.”
Banks will often discourage clients from simply gravitating towards currencies they think have short or medium-term return potential. There are many sound reasons why a client might change their base currency. For example, succession planning – if the next generation are living in a different currency zone – or a change in the focus of their business interests.
There is little consistency in the way customers of leading private banks view most of the major global currencies. For example, while many ABN Amro clients have the euro as their reference currency, RBC Wealth Management reduced its exposure to the European single currency 18 months ago. However, when it comes to the dollar, there is more accord.
“Our portfolios are predominantly weighted towards GBP and USD, but since the start of the year our clients have favoured the dollar overall,” explains RBC’s Bowman.
“They are still wary of being outright long of EUR and also remain sceptical of currencies of countries where there is – or remains the threat of – central bank intervention, such as the yen and the Swiss franc.”
JPMorgan Private Bank clients also favour the dollar, says Boquin, adding that expectations of further European Central Bank quantitative easing have encouraged borrowed in EUR.
|US dollar: special focus|
ABN Amro’s second-largest reference currency by volume is the dollar. Duret observes that interest in USD as a diversification currency has risen since the beginning of 2015.
“Interest in Asian currencies – in particular RMB bonds – has also increased and the process of liberalizing the RMB will probably accentuate this trend,” he says.
According to Boquin, emerging-market currencies continue to face a difficult fundamental outlook, although some of his clients have started to consider long positions either explicitly through the currency market or implicitly via stocks and bonds.
For the remainder of 2015, he says the key theme is likely to remain the divergent monetary policy stance of the main central banks.
ABN Amro’s Duret adds the debate over the UK’s membership of the EU to the mix, pointing out that the possibility of a UK exit would affect sterling ahead of the referendum – although the precise timing of any volatility is uncertain since a date has not been set for the referendum.