Business Spectrum✨
FOREX
Foreign Exchange Market
The foreign exchange (Forex) market is a global, decentralized marketplace where currencies are traded. It sets exchange rates for all currencies and encompasses the full spectrum of currency buying, selling, and exchanging at both current and agreed-upon prices.
FX Currencies
Currencies can be complex, and we believe that taking foreign exchange (FX) risk typically doesn’t deliver consistent rewards over medium- to long-term investment horizons. Instead of viewing FX exposure as a source of return, we see it as a potential risk to portfolio stability that requires strategic management.
Why hedge? For most long-term investors, the primary reason is to reduce volatility. Currency fluctuations can significantly amplify the ups and downs of portfolio returns – especially in low-yield fixed income assets – making hedging an effective tool to stabilize performance.
Key Highlights
Currency risk plays a notable role in portfolio volatility, especially in equity markets like the eurozone and UK. While its impact is less pronounced on equities compared to overall portfolio risk, it remains significant. Japan is a unique case, where the yen often moves inversely to the domestic stock market, offering some natural diversification.
We recommend investors hedge the majority of their FX exposures in major developed markets. In particular, we advocate for fully hedging fixed-income positions while allowing some equity exposure to remain unhedged — especially for European investors. We outline optimal hedge ratios for typical portfolios and support the use of permanent hedging strategies over dynamic approaches, which attempt to adjust FX exposure based on market conditions.
Short-term FX risk can offer tactical opportunities, given the liquidity and responsiveness of currency markets. Key factors influencing FX movements include central bank policies and interest rate differentials, investor sentiment, technical market indicators, valuation metrics, and underlying economic conditions.