Chance to make money in
currencies
Strengthening of Singdollar opens up forex
opportunities for investors
Ask any big-time trader about currency
trades and chances are that he will bemoan the upheavals of
currency trading while boasting of winnings – all in a single
breath. Such is the bittersweet nature of this market.
Since
the Monetary Authority of Singapore (MAS) revealed its stance for a
steeper-than-expected gradual strengthening of the local currency,
the question on most minds is: How should that dictate which
currency I should buy or hold?
At the
first blush, the logical deduction of the move by MAS may seem
obvious. A strengthening Singapore dollar would mean one should buy
the local currency. Or for the non-trader, perhaps a holiday in the
US is more beckoning. Put another way, the latest development may
also reduce the incentive for investing in foreign
currencies.
The
Singapore dollar (SGD) has strengthened against the US dollar (USD)
slightly from 1.258 before MAS announced the tightening policy to
1.253.
Still,
experts warn against being hasty.
“It must
be stressed that this is to be a gradual appreciation, not an
overnight move. This announcement has no appeal for currency
traders who like their action to be faster,” says Mr Justin Harper,
IG Markets Singapore’s market strategist.
An
active currency strategy for patient investors who can ride out the
volatility may make sense.
“For those
willing to be patient and ride out a few blips when risk-off
sentiment sees a weakening dollar, it makes sense to hold some
Singapore dollar as it appreciates,” says Mr Harper.
Most
currency traders are the big boys, but retails investors can
dabble. Forex trading can be done
online.
Several
companies such as Saxo Bank, IG Markets, Phillips Capital and even
banks give retail investors direct access to the Forex (FX)
market.
Forex
trading allows you to take large leveraged positions, of as much as
200 times. This means that you can use $100 to trade up to $20,000
worth of currencies, but therein too lie the risks.
Singapore is the world’s fourth-largest FX centre and Asia’s
second-largest only after Tokyo.
“FX is
the most popular asset class our clients trade, dwarfing our
equities and commodities business ,” says Mr Harper.
“Not many people understand the volatility in the
FX market, which is far higher than equities,” says Singapore-based
Mr Nizam Idris, Macquarie Bank’s head of rates and currency
strategy.
Volatility is a simple way of measuring risk. “You need to be able
to stomach its wild swings,” he says.
As for the strategy of
simply holding Singapore dollars, Mr Nizam does not regard that as
investing. “If you hold Singapore dollars, it’s your base or home
currency, So you’re not investing.”
But if you think it is,
then Mr Nizam says: “The SGD may remain stable against the USD as
we expect the United States to post a decent economic recovery of
2.5 per cent this year. But it could appreciate against the euro
where macro data is weak. If the European Central Bank doesn’t do
anything, the currency would be weaken. If it cuts rates, the
currency will weaken also.”
Currencies trade in pairs. When an investor makes a trade, he or
she is long on one currency and short on the other.
Investopedia cites a clear example-if a trader sells one standard
lot (equivalent to 100,000 units) of euro/US dollar (EUR/USD), he
would, in essence, have exchanged euros for dollars and would now
be “short” euros and “long” dollars.
The most popular pairing pairings include the EUR/USD, which is the
most liquid pair globally, as well as the US dollar/Japanese yen
(USD/JPY) and Australian dollar/US dollar (AUD/USD).
For
Asian trading sessions, the South Korean won (KRW) and SGD are also
very liquid, while the Chinese yuan (CNY) is fast catching up, as
Beijing liberalises offshore trading in the currency.
Several
factors dictate the movement of currencies – economic prospects and
monetary policies being chief among them.
Strong
economic fundamentals generally lend support to a currency. When an
economy is facing rising inflation, policy-makers could raise
interest rates, which would in turn strengthen the currency and
hold down inflation.
On that
note, Citibank Singapore’s head of wealth management Shrikant Bhat
says currencies of countries with
extremely loose monetary policies and high debt ratios are red
flags. Investors should avoid speculating in such
currencies.
Retail
investors should also watch out for geopolitical risks, which can
lead to potential flight of capital, resulting in currency
weakness.
As
a general rule, an investor should ascertain his risk appetite,
investment aims and horizons.
Mr
Bhat says investors may consider grouping their currencies based on
certain characteristics such as high correlation with commodities
such as the AUD, New Zealand dollar (NZD), Canadian dollar (CAD) or
even South African rand (ZAR).
Emerging
market currencies that investors are familiar with include the
Indonesian rupiah (IDR),Philippine peso (PHP) and Indian rupee
(INR).
Developed market currencies such as the US dollar, the euro and the
British pound (GBP) have been deep liquidity – that is, lots of
investors are trading these currencies.
To enjoy
the potential gains, investors could diversify their basket to
include these currencies.
Quick Take On Key Currencies ‘
Movement
The Sunday Times offers those tempted by
the currency markets some quick takes on several key economies and
the likely direction of key currencies.
·
Singapore dollar
(SGD)
The rising cost of living is a challenge
for the Singapore Government and policymakers here.
High
inflation in the Republic will necessitate a stronger currency
further supported by a healthy and
resilient economy.
Macquarie
Bank’s head of rates and strategy Nizam Idris suggests going long
on the Singapore dollar versus the Malaysian ringgit.
As for the
SGD/USD, street estimates have a 12-month target that it could
strengthen to 1.21 from 1.25 currently.
Analysts
say the risks are a slowdown in export and regional growth and a
real estate bust.
IG
Markets Singapore’s market strategist Justin Harper says that one
needs to have a sit-and-hold approach to trading SGD/USD as the
appreciation will be gradual, as long as inflation continues to be
high.
In
short, if patience is not one of your best virtues, consider a
different currency pairing.
·
US dollar (USD)
Pundits ‘ view on the United States ‘
economic outlook are a mixed bag.
Pessimists say the nation is not completely out of the woods and
could slip into recession. Others say it set for anaemic growth
while the optimists expect decent growth this year.
What
does all that mean for the greenback ?
If you
find the optimistic take convincing, then naturally the US dollar
will be supported by improving economic prospects.
Mr Nizam
is one such optimist. “We think that the USD can outperform other
funding currencies in the coming months.”
Further
supporting the US dollar, says Mr David Kohl, chef currency
economist at Bank Julius Baser, is the uncertainty over the Federal
Reserve‘s zero-interest rate commitment.
He
points out, however, that the Fed’s high inflation tolerance (rates
are raised as a means to contain inflation) undermines the role of
the US dollar as a store of value, he says.
·
Australian dollar
(AUD)
The Aussie dollar has weakened against the
Singdollar, falling from a peak of 1.36 in mid-February to 1.295
currently.
This could stir excitement to buy the Australian dollar but Credit
Suisse’s Asia Pacific private banking senior FX
strategist Heng Koon How throws a word
of caution as odds have increased for the Reserve Bank of Australia
to cut its key benchmark interest rate by 25 basis points to 4 per
cent when it meets on May 4. This will weigh on the Australian
Currency.
As
the AUD/SGD exchange rate is traditionally volatile, Mr Heng
suggests waiting for more clarity before investing in the currency
Down Under.
Mr
Shrikant Bhat, Citibank Singapore ‘s head of wealth management
likes the high-yielding AUD given its relatively strong
fundamentals.
That and
Australia’s correlation to China’s growth on commodity exports
gives the AUD attractive potential capital appreciation in a
certain risk-on scenario, he says.
·
Japanese yen (JPY)
The Japanese yen has persistently
strengthen in recent years, not on economic strength but owing to
safe haven flows exiting the US and Europe.
This has in turn hurt Japan’s exports, contributing to its trade
deficit from healthy surpluses prior to the crisis.
To
tackle that, the Japanese central bank is expected to ease rates to
stop the rot.
That and
other factors could drive the yen down.
Mr
Nizam recommends going long on the Korean won – as it’s very
sensitive to global growth and provides a higher yield – and
shorting the yen.
·
Chinese yuan (CNY)
The Chinese yuan trading band was widened
to 1 per cent against the US dollar effective from last Monday.
That means more volatility.
This is
viewed as a necessary step in the ongoing process by China to
internationalise its currency.
Credit
Suisse Asia Pacific private banking’s senior economist and FX strategist Shivani Tharmaratnam expects the
yuan to continue its gradual trend appreciation in the months ahead
as growth momentum improves.
“The currency is still undervalued so we’ll get a stable if not
slightly stronger yuan over the next 12
months,” says Mr Nizam.
·
Euro
Most forex strategists say investors should
avoid buying the euro as it subject to large fiscal loosening given
the euro zone debt crisis, which will lead to currency depreciation
over the long term.
Mr
Nizam recommends going short on the euro given the lingering debt
crisis and long on the Chinese yuan or even the Singapore
dollar.
Not
surprisingly, the euro remains largely unpopular even if valuations
suggest it may be cheap.
Invest, The Sunday Times, Pg.
37-38