Vasu Menon of OCBC Bank reveals his outlook for the currency markets, and looks at the resulting opportunities and issues for investors.
Date: Oct 2011
As long as the risk aversion continues in the market, and as long as politicians in the US and Europe are not able to resolve their issues, then such developments augur well for the US dollar, he explained.
But that’s really only by default on a relative basis, said Menon, because the structural fundamentals in the US are not good.
In the short term, commodity currencies like the Australian and New Zealand dollars have been affected by what is happening in Europe, the risk aversion and the stronger US dollar, said Menon.
In the medium term, however, he said he is positive about commodities, so commodity currencies will do well.
Australia, for example, is enjoying decent growth and relatively low unemployment, certainly compared with the US economy.
Mis-understanding currency markets
According to Menon, a lot of investors think currency markets are a quick-win to make money. Yet currency markets are extremely risky, he warned.
Especially at the moment, he added, where volatility is extremely high, currency markets are very news-driven, which is in itself volatile.
Investors therefore have to bear in mind that they shouldn’t get carried away with currencies, They should manage their risk, and take a medium-term view on whatever they invest in.
Managing risks of investing in currencies?
One way that investors can invest in the currency markets is via dual-currency investments – which are structured products where an investor can manage their risk to a certain extent.
Essentially, it’s important that investors don’t invest more than 10% to 20% of their total portfolio in currencies, as a way for them to manage risks, added Menon.