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Parity party pooping

It’s good when simple questions are answered in terms that even thickies like me can understand. Recently, I have been slavishly following EUR/GBP because, more by luck than judgement, I am long of a euro-denominated asset and I have started wondering if I can – in a phrase so often heard wheeled out over the past few years – release some alpha through FX. It seems the prospects of EUR/GBP reaching parity change daily, so I have been struck by a bad case of dithering: Should I hedge or not?

David Simmonds, head of FX strategy and research at RBS, is one person who thinks parity will not be reached. “I have been invited to many metaphorical parity parties over the last couple of years and have declined to attend them all. In the event, I missed very little because very few of those parties ever actually took place (USD/CAD was an exception, although not for long),” he tells me. “Most absurd last year was the incessantly shrill invitation to the AUD/USD parity party as the world became obsessed with carry and blind to volatility and risk adjusted returns. I’m sure I also have filed away somewhere some ill-judged invites to a USD/TRY parity party.

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