Ways to keep your savings under protracted stagnation scenario

Ways to keep your savings under protracted stagnation scenario

by Alexander Varyushkin, Partner, Head of Asset Management

The strengthening of the US dollar has been the most prominent financial market trend of the last three months. Its prominence is due to the fact that the speed of the dollar surge over the last three months has been approximately on a par with the speed of the US currency’s rise in the acute stage of the Greece crisis of 2011 (Anyone recalls what was on the agenda back in 2011? – It was the time when many observers discussed in all seriousness the possibility of the Eurozone breaking up). On the whole, over the last three months the dollar has strengthened 7% against a trade- weighted basket of the world’s leading currencies (where the euro and the Japanese yen account for 70%).

The most common explanation for this trend is that the market is positioning itself for a rate hike by the US Federal Reserve (in our previous review, we dwelled on the interest rate market expecting the refinancing rate to rise to 3.75% by the end of 2017). This explanation does not seem to fit well with the performance of other markets though. Take the US Treasuries market, for example – over the same three months the yield on 10-year bonds fell from 2.5% to 2.3%, which is hardly consistent with expectations of higher interest rates. The market is still reluctant to lend an attentive ear to the forecast voiced by the Federal Reserve System, and in a sense, the minutes from the previous meeting of the Federal Open Market Committee seem to justify this mistrust – the Fed is treading more cautiously than it previously appeared to despite the improving labour market data. The situation on the financial markets best suits a protracted stagnation scenario – low economic growth and low inflation, low returns on risk-free instruments and continued monetary easing. The way gold and oil prices have behaved over the last three months is also well in tune with that scenario.

They have fallen by 8% and 18% respectively, although with geopolitical tensions reaching their five-year peak one would expect markets moving in exactly the opposite direction. It should be said that almost all risky assets – on equity markets as well as on corporate bond markets – have recently retreated quite significantly which also lends support to our understanding that the markets are positioning themselves for the “Japanese scenario” rather than monetary policy tightening, and the dollar is a safe haven, not a prospective carry trade currency. That the market is bracing itself for some scenario or other is, of course, by no means an indication that that particular scenario will play out – so far the macroeconomic data does not even remotely point towards the Japanese scenario.

Speaking in practical terms – the sharp rise of the US dollar and the corresponding drop in the value of other currencies has once again left wealthy individuals wondering whether their choice of currency to keep their savings in was a wise one. The question always arises when some significant market movement has occurred, and it always goes something like this: Well, yes, I know that I should have switched into that other currency before but now, when the dollar has gained so much ground, shouldn’t I wait for one, two, three months for a correction, which would offer me an opportunity to switch into dollars at a more favorable rate? However, there is no one out there to give a practical answer to this question since there is no reliable way to predict exchange rate movements during such short periods of time.

To lift the burden of missed opportunity from the shoulders one needs to imagine that the money has actually been converted into in the right currency a long time ago at a more advantageous exchange rate compared to the one prevailing today. What would you be doing now then? Switching back into euros or the Japanese yen? Or could it be the rouble or the Turkish lira? The vast majority of people preoccupied with preserving their capital would feel happy they had made the right decision and leave everything as it is. Or maybe not – that is if they decide that some other currency at current levels is a better vehicle for preserving their capital than the dollar. When picking a currency to keep your savings in you should look not at the way exchange rates behaved recently and how the current levels have come to pass. Which is the best currency to preserve the money you are not planning to spend in the next two or three years? We are talking only about preserving your capital, not capitalising on investments in the Bangladeshi Taka. We deem that the last three months have changed little in our priorities regarding currencies for capital preservation. As before, the pick of the bunch is the US dollar – currently, the only full-blown reserve currency, which fits the purpose of money preservation by default, as the benchmark.

The second place (and, if we are honest, the last one on this list) goes to the Chinese yuan, which is slowly but surely edging towards at least challenging (if not toppling) the dollar on the pedestal (a propos, in the last three months, in contrast to all other major developed and emerging market currencies, the yuan has not only not weakened against the dollar but has actually gained some ground). That essentially brings us to the end of our list – the euro, the British pound and the Japanese yen over the last three months have lost their overvalued status against the dollar and are currently attracting more or less neutral valuations. That hardly makes a case for keeping your money in the yen, for instance. Emerging market currencies such as the Brazilian real, the Russian rouble and the South African rand could only be considered for speculative investments, not as capital preservation vehicles. And the outlook for such investments, given the current prices for mineral commodities and their impact on state budgets and trade balances, does not look particularly bright.

Should you wish to receive recommendations, ask questions or get in touch with our experts, please email us info@orcap.co.uk or call +44 (0) 207 725 6900

Most Recent News

UK Will Open New Business Immigration Routes

UK Will Open New Business Immigration Routes

UK Closes Immigration Route to Investors

UK Closes Immigration Route to Investors