To understand the movements in EUR/USD over the past year, it is not helpful to pay too much attention to what is written or said about it online or on LinkedIn. In fact, over the past 13 months, the EUR/USD exchange rate has fluctuated by only +/- 3% within a fairly narrow sideways channel centred around 1.1750. This represents less than half of the currency pair’s volatility range. I generally describe this state of low fluctuation as ‘noise’, depending on how loudly the related reports are bombarding you.
Noise Is Unpredictable
In my nearly 30 years of experience, it has simply not been possible to predict minor fluctuations. While one can use technical analysis to identify short-term trends, this would require nearly 100% of one’s waking hours. You don’t have that kind of time or dedication in treasury. I’ve moved past that myself, although I do occasionally use it for short-term actions when thinking about fund management.
When managing an industrial portfolio, it is important to ignore market noise. Prolonged periods of market noise, however, should be seen as an opportunity to reassess the strategic direction.
Today, Certain Things Are Crystal Clear
- The USD is very expensive in the long term
- Inflation is higher in the United States
- U.S. debt has reached record levels
- The challenge posed by China is putting enormous pressure on the US budget
- The USD has consistently come under pressure whenever commodity prices have begun to rise and remain high
These certainties are accompanied by strong stock markets that are attracting huge amounts of capital from around the world. The fact that this influx of capital is not leading to a stronger US dollar, as it did in the past, should serve as a stark warning to European industrial leaders. ‘If rising demand doesn’t drive up prices, something’s up.’
Doubts About the US Are Growing
- The confidence in the resilience of relations with the United States has been shaken
- People’s faith in the Fed’s independence has been shaken
- People’s faith in the Fed’s independence has been shaken
- The United States’ ability and willingness to repay its debt is being called into question
- The trend in US inflation is a cause for concern
Consequently, U.S. Investments Are Being Hedged Against Depreciation of the U.S. Dollar at Portfolio Level to a Greater Extent Than Before
Asset managers are extremely unaware of currency risks, particularly given that market trends have consistently supported their approach and the USD has been a top performer for a long time.
If asset managers start systematically ruling out the USD as a risk by hedging their USD positions, translation risks, which industrial companies have also ignored so far, will become a future burden.
I know it’s hard to break habits. However, given the challenging situation we are in, I would consider ignoring it to be grossly negligent. USD risks must be hedged in the short, medium and long term.
