Chance to make money in currencies
Strengthening of Singdollar opens up forex opportunities for investors
Ask any big-time trader about currency trades and chances are that he will bemoan the upheavals of currency trading while boasting of winnings – all in a single breath. Such is the bittersweet nature of this market.
Since the Monetary Authority of Singapore (MAS) revealed its stance for a steeper-than-expected gradual strengthening of the local currency, the question on most minds is: How should that dictate which currency I should buy or hold?
At the first blush, the logical deduction of the move by MAS may seem obvious. A strengthening Singapore dollar would mean one should buy the local currency. Or for the non-trader, perhaps a holiday in the US is more beckoning. Put another way, the latest development may also reduce the incentive for investing in foreign currencies.
The Singapore dollar (SGD) has strengthened against the US dollar (USD) slightly from 1.258 before MAS announced the tightening policy to 1.253.
Still, experts warn against being hasty.
“It must be stressed that this is to be a gradual appreciation, not an overnight move. This announcement has no appeal for currency traders who like their action to be faster,” says Mr Justin Harper, IG Markets Singapore’s market strategist.
An active currency strategy for patient investors who can ride out the volatility may make sense.
“For those willing to be patient and ride out a few blips when risk-off sentiment sees a weakening dollar, it makes sense to hold some Singapore dollar as it appreciates,” says Mr Harper.
Most currency traders are the big boys, but retails investors can dabble. Forex trading can be done online.
Several companies such as Saxo Bank, IG Markets, Phillips Capital and even banks give retail investors direct access to the Forex (FX) market.
Forex trading allows you to take large leveraged positions, of as much as 200 times. This means that you can use $100 to trade up to $20,000 worth of currencies, but therein too lie the risks.
Singapore is the world’s fourth-largest FX centre and Asia’s second-largest only after Tokyo.
“FX is the most popular asset class our clients trade, dwarfing our equities and commodities business ,” says Mr Harper.
“Not many people understand the volatility in the FX market, which is far higher than equities,” says Singapore-based Mr Nizam Idris, Macquarie Bank’s head of rates and currency strategy.
Volatility is a simple way of measuring risk. “You need to be able to stomach its wild swings,” he says.
As for the strategy of simply holding Singapore dollars, Mr Nizam does not regard that as investing. “If you hold Singapore dollars, it’s your base or home currency, So you’re not investing.”
But if you think it is, then Mr Nizam says: “The SGD may remain stable against the USD as we expect the United States to post a decent economic recovery of 2.5 per cent this year. But it could appreciate against the euro where macro data is weak. If the European Central Bank doesn’t do anything, the currency would be weaken. If it cuts rates, the currency will weaken also.”
Currencies trade in pairs. When an investor makes a trade, he or she is long on one currency and short on the other.
Investopedia cites a clear example-if a trader sells one standard lot (equivalent to 100,000 units) of euro/US dollar (EUR/USD), he would, in essence, have exchanged euros for dollars and would now be “short” euros and “long” dollars.
The most popular pairing pairings include the EUR/USD, which is the most liquid pair globally, as well as the US dollar/Japanese yen (USD/JPY) and Australian dollar/US dollar (AUD/USD).
For Asian trading sessions, the South Korean won (KRW) and SGD are also very liquid, while the Chinese yuan (CNY) is fast catching up, as Beijing liberalises offshore trading in the currency.
Several factors dictate the movement of currencies – economic prospects and monetary policies being chief among them.
Strong economic fundamentals generally lend support to a currency. When an economy is facing rising inflation, policy-makers could raise interest rates, which would in turn strengthen the currency and hold down inflation.
On that note, Citibank Singapore’s head of wealth management Shrikant Bhat says currencies of countries with extremely loose monetary policies and high debt ratios are red flags. Investors should avoid speculating in such currencies.
Retail investors should also watch out for geopolitical risks, which can lead to potential flight of capital, resulting in currency weakness.
As a general rule, an investor should ascertain his risk appetite, investment aims and horizons.
Mr Bhat says investors may consider grouping their currencies based on certain characteristics such as high correlation with commodities such as the AUD, New Zealand dollar (NZD), Canadian dollar (CAD) or even South African rand (ZAR).
Emerging market currencies that investors are familiar with include the Indonesian rupiah (IDR),Philippine peso (PHP) and Indian rupee (INR).
Developed market currencies such as the US dollar, the euro and the British pound (GBP) have been deep liquidity – that is, lots of investors are trading these currencies.
To enjoy the potential gains, investors could diversify their basket to include these currencies.
Quick Take On Key Currencies ‘ Movement
The Sunday Times offers those tempted by the currency markets some quick takes on several key economies and the likely direction of key currencies.
· Singapore dollar (SGD)
The rising cost of living is a challenge for the Singapore Government and policymakers here.
High inflation in the Republic will necessitate a stronger currency further supported by a healthy and resilient economy.
Macquarie Bank’s head of rates and strategy Nizam Idris suggests going long on the Singapore dollar versus the Malaysian ringgit.
As for the SGD/USD, street estimates have a 12-month target that it could strengthen to 1.21 from 1.25 currently.
Analysts say the risks are a slowdown in export and regional growth and a real estate bust.
IG Markets Singapore’s market strategist Justin Harper says that one needs to have a sit-and-hold approach to trading SGD/USD as the appreciation will be gradual, as long as inflation continues to be high.
In short, if patience is not one of your best virtues, consider a different currency pairing.
· US dollar (USD)
Pundits ‘ view on the United States ‘ economic outlook are a mixed bag. Pessimists say the nation is not completely out of the woods and could slip into recession. Others say it set for anaemic growth while the optimists expect decent growth this year.
What does all that mean for the greenback ?
If you find the optimistic take convincing, then naturally the US dollar will be supported by improving economic prospects.
Mr Nizam is one such optimist. “We think that the USD can outperform other funding currencies in the coming months.”
Further supporting the US dollar, says Mr David Kohl, chef currency economist at Bank Julius Baser, is the uncertainty over the Federal Reserve‘s zero-interest rate commitment.
He points out, however, that the Fed’s high inflation tolerance (rates are raised as a means to contain inflation) undermines the role of the US dollar as a store of value, he says.
· Australian dollar (AUD)
The Aussie dollar has weakened against the Singdollar, falling from a peak of 1.36 in mid-February to 1.295 currently.
This could stir excitement to buy the Australian dollar but Credit Suisse’s Asia Pacific private banking senior FX strategist Heng Koon How throws a word of caution as odds have increased for the Reserve Bank of Australia to cut its key benchmark interest rate by 25 basis points to 4 per cent when it meets on May 4. This will weigh on the Australian Currency.
As the AUD/SGD exchange rate is traditionally volatile, Mr Heng suggests waiting for more clarity before investing in the currency Down Under.
Mr Shrikant Bhat, Citibank Singapore ‘s head of wealth management likes the high-yielding AUD given its relatively strong fundamentals.
That and Australia’s correlation to China’s growth on commodity exports gives the AUD attractive potential capital appreciation in a certain risk-on scenario, he says.
· Japanese yen (JPY)
The Japanese yen has persistently strengthen in recent years, not on economic strength but owing to safe haven flows exiting the US and Europe.
This has in turn hurt Japan’s exports, contributing to its trade deficit from healthy surpluses prior to the crisis.
To tackle that, the Japanese central bank is expected to ease rates to stop the rot.
That and other factors could drive the yen down.
Mr Nizam recommends going long on the Korean won – as it’s very sensitive to global growth and provides a higher yield – and shorting the yen.
· Chinese yuan (CNY)
The Chinese yuan trading band was widened to 1 per cent against the US dollar effective from last Monday. That means more volatility.
This is viewed as a necessary step in the ongoing process by China to internationalise its currency.
Credit Suisse Asia Pacific private banking’s senior economist and FX strategist Shivani Tharmaratnam expects the yuan to continue its gradual trend appreciation in the months ahead as growth momentum improves.
“The currency is still undervalued so we’ll get a stable if not slightly stronger yuan over the next 12 months,” says Mr Nizam.
· Euro
Most forex strategists say investors should avoid buying the euro as it subject to large fiscal loosening given the euro zone debt crisis, which will lead to currency depreciation over the long term.
Mr Nizam recommends going short on the euro given the lingering debt crisis and long on the Chinese yuan or even the Singapore dollar.
Not surprisingly, the euro remains largely unpopular even if valuations suggest it may be cheap.
Invest, The Sunday Times, Pg. 37-38
Bro 'M the Name', thanks for the article. I've been thinking of making deposit & investment into Aussie dollar with DBS, didn't see a section about it so can you share what you think about the SG - Aussie foreign exchange rate? Thanks in advance..