Currency Volatility

by: , Chief Investment Officer and Managing Director | IndexIQ

No feast lasts forever, as the old saying has it. At some point – no one knows exactly when – this will hold true for the remarkably low period of volatility experienced by the markets for much of this year.

There are rumblings. In the U.S., the Fed continues to pursue its policy of gradual interest-rate increases. More recently, it has been joined by a European Central Bank (ECB) that has started to make noises about a gradual move away from its accommodative policies.

In a June speech, ECB president, Mario Draghi, indicated as much. The result was an immediate jump in the value of the euro relative to the dollar, to the highest level since September of last year.1

So volatility is not really dead, at least as it pertains to the currency markets – it’s just been keeping a low profile. Based on the rumblings from the central banks, that could all change pretty quickly. On current pace, the era of negative and ultra-low interest rates appears to be drawing to a close in both the U.S. and the Eurozone. Exactly how markets will react is anyone’s guess at this point, but some kind of realignment is almost certainly in order. For international investors, currency moves may again play an outsize role in overall returns.

That impact can be particularly significant for those investors who are looking for income, rather than speculating on currency movements. Now, like everybody else, they find themselves playing a game of three-dimensional chess, involving the direction of interest rates, the pace of policy change, and the movements of the dollar, the euro, the pound, the yen, and the yuan (among others) on both an absolute and a relative basis.

From Brexit to the Bank of Japan, there are a multitude of pieces in motion. As central banks move towards “normalization”, the level of volatility is likely to accelerate. Given the level of uncertainty, it makes sense for investors to consider hedging a little, with the goal of reducing exposure to any one currency or policy outcome.

1. Source.

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Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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