Currency strategists are reconsidering their euro hedging policies in anticipation of a US slowdown....
Currency strategists are reconsidering their euro hedging policies in anticipation of a US slowdown.
However, despite the relative attraction of the recovering euro zone countries in the face of a Federal Reserve determined to squash inflation, there is uncertainty that the downward pull on the euro will finally lose its momentum.
Gartmore's currency strategy for the euro has just changed from neutral to long. Bob Jolly, head of fixed income portfolio management, is positive on the euro, but not ecstatic.
The US-euro zone shift is a broad positive, but there are still good arguments for being bearish. For example, there is a fear that, in the long-term, Europe is only capable of growing by 3%-3.5% per annum without the risk of inflation, whereas the US can manage around 4%-4.5%. Nonetheless, Jolly thinks it is worth putting a carefully calculated bet on the euro rising, but will not try to guess the exact figures.
He said: "You can get a direction right, but if you start being specific then either you have got the clearest crystal ball in the world or you are deluding yourself."
The fixed income portfolios tend to have a more proactive currency stance, but Jolly does not make specific predictions. Gartmore has an automatic cut-out mechanism to prevent any significant losses in case the currency call is wrong.
Fund manager Ashburton runs relatively careful portfolios and hedging is therefore the rule rather than the exception.
It tracks currency shifts daily but does not engage in currency speculation, instead using hedging as an insurance policy against medium to long-term loss. The hedge was temporarily removed over the summer of 1999 in response to positive signs from the currency - anything less than a two or three-month trend is generally not regarded as grounds for policy change.
Frances Wilson, investment manager responsible for currency strategy at Ashburton, is now looking for a change of direction.
She said: "For the past few months we have been hedging the euro. Now we think it is in overshoot territory."
She thinks the fall of the euro since its inception was due to overvaluation brought about by excessive demand for the new currency. The story of the euro since then has been the story of large holders of the currency selling off, keeping momentum going.
"We have got an econometric model which indicates that the euro was above value at launch. Prior to the launch, a lot of big investors and central banks bought into the legacy currencies - the deutschmark and the franc. Many investors thought the euro would be a reserve currency, so before January 1999 it had a sharp run-up.
"Central bodies such as the Bank of England and the Fed were going to have to hold some of their reserves as euros as an operational necessity. Japanese investors and authorities were particularly keen buyers."
The general consensus among analysts as to the fair value for the euro is between $1.05 and $1.15, according to Wilson. But currencies are driven by investor sentiment just as much as other markets and it will have to hit rock bottom before the euro can regain some of its strength.
The continued fall has been sustained by institutional investors finally succumbing to pressure and selling their euro holdings. It is only after this series of sales is over that a recovery will be seen, but when it comes it should take the form of a v-shaped bounce.
The currency is fairly static at the moment, having trouble breaking the 91c and 60p levels as the market waits for the Fed's interest rate strategy to emerge.
However, as long as the Fed maintains its determination to cool-down the US economy, it should be a positive for the euro. This is because euro/dollar valuations have historically been based on relative valuation of the economic strength. As the US slows down and Europe picks up, the euro should start to pull up.
Harriett Richmond, head of currency management for JP Morgan, has moved from a negative outlook for the euro to a neutral view.
The balancing factors are a slowing US economy but high interest rates to a strong euro zone economy with lower interest rates.
She said: "Last year there was a good reason to be hedged. Based on the current fundamentals, investors can afford to be indifferent."
The Ashburton balanced funds are fully hedged in respect to euro investments.
The group's European equity fund can be somewhat less sanguine as its performance is measured against its peer group, rather than by absolute performance.
Currency variations are therefore less important and, given Ashburton's view that the euro is at its nadir, hedging is less desirable.
Succeeding co-founder Simon Rogerson
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