The Currency Question....

Dear Reader and Fellow Investors,

As an investment advisor for a private bank, I am often asked where currencies are heading over the course of the day.

I am happy to say that due to my lack of foresight in such events, fewer and fewer bankers and clients are asking me my opinion on such short term matters.

However, I understand that clients longer term fears represent a meaningful question that any respectable investment advisor cannot pass.

Though currencies do generate a yield, as anchored by the base rate which is determined by the central bank of that currency, we decide not to determine a currencies value by discounting future expected interest rates (as could be taken from the yield curve of, for example, 30 year government bonds). We feel the potential of error is too large to believe in such an approach.

Instead, our currency allocation is principally determined by two factors:

1.An aim to be (close to) currency neutral relative to the clients base currency

2.We aim to buy assets that are available at good prices. If we do this, eventually others will buy them also. To do so, they will need to buy the currency that asset is denominated

Hence in early 2009 we were heavy buyers of USD assets, much like now we are starting to buy EUR denominated assets. Hence security selection guides our currency allocation. It is important to note we also add a macroeconomic overlay to ask ourselves how the macro environment in a particular currency can affect us negatively (we are not concerned with how it may affect us positively, that will be a bonus if it occurs). If we feel relative to another currency there are bigger macroeconomic problems, we would apply a larger discount before buying securities in that currency.

With regards to the current panic on the EUR, I would quote the great research based investors, such as Mr. Jim Rogers, who over a decade ago talked about the potential problems we are now seeing in Euro land. All that has changed is the media has spread the story to every household, creating a panic that is feeding off itself. No doubt, what Mr. George Soros would call a “vicious circle.”

As for my humble opinion on such factors: Though the USA, and therefore the USD, has more political wealth than the EUR due to its greater unity and therefore greater speed of reaction, economically, they are more similar than we care to believe. It is likely that over the next few years we will be involved in a “currency carousel” as the market judges which of the big three currencies is actually in a worst economic position (the contenders being the USD, EUR and GBP). Unfortunately the paper money of each, in my humble opinion, all need to de value relative to real assets.


Yours sincerely,

Alessandro Sajwani