By Thomas Kostigen
The best performing currency in 2019 was the British pound. And its rise in value — which didn’t fully come ‘round until well past the midyear mark — was almost all due to the United Kingdom’s plan to exit from the European Union (Brexit).
The pound, or GBP, rose more than five percent against the US dollar last year. Had you invested in the spot currency markets on the first day of trading in 2019 and cashed out on the last — the GBP would have reigned king for you. But the currency markets, as we described in last week’s column, are fickle. For example, you would have had to wait until August of 2019 to see a turnaround in the pound’s value. That’s when the UK, after electing Boris Johnson its new prime minister in July, assuaged fears that it would “hard crash” out of the EU without a deal in place.
Picking winners in the currency markets isn’t all about trade agreements — but they have a lot of influence over a currency’s performance. Take Canada. It became the second-best performing currency versus the dollar last year after a new trade agreement was signed with the United States. The US is Canada’s biggest trading partner, accounting for about 70 percent of its exported goods.
There are myriad ways to invest in the currency markets, or take advantage of big swings in currency values. A stronger dollar may even allow you to more robustly invest in a foreign capital market, getting more shares or bonds for your money. Currency fluctuations may also affect the share price of a foreign company that trades on a US exchange. Or currency values may affect a US company that has operations or does a lot of business in a foreign country.
Coca-Cola, for instance, is highly reliant on foreign earnings, and last July during an earnings call it made a special reference to how foreign exchange rates were negatively affecting its overseas profits. (For the record, Coke upped its earnings’ forecast; it just noted that its stock would have performed better if foreign exchange rates improved.)
To be sure, investment professionals such as financial advisors know the many ways in which the forex markets can be invested in directly, or indirectly. Their advice should be sought before stepping into the highly volatile and risky forex market.
Forecasts for this year are for the euro to be the best performing currency, followed by the Norwegian krone. The euro has been weighed down over the past two years by a decline in its power within the global economy and political squabbling within its ranks, never mind the hullabaloo over the UK leaving the EU. Analysts finally see a turnaround for the EU this year, as the global economy ticks up and negotiations settle with the UK.
The Norwegian krone is gaining attention on belief that Norway’s central bank will hold interest rates steady— a shift in policy from last year when it had a policy of tightening rates. Holding rates steady typically indicates an economy is on solid footing.
No matter which major currency we are talking about, however, the US dollar is widely expected to go down in value versus it this year. How can you trade on that consensus? Or how might a decline in the dollar’s value affect your portfolio? We’ll answer those questions and look at the importance of custody in next week’s column.
Thomas Kostigen is a contributing writer to www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.