Volatility: bring it on!

Morning. We have entered what can only be described as familiar territory with a different set of reasons? Sterling keeps getting sold (see the middle graph), the Euro gets bought (right graph). No new reasons for selling Sterling, as the UK economy and banking sector have been hit as hard as (or maybe worse) than the US. Definitely worse than Europe hence the underperformance of Sterling. It could be argued that it was a perfect storm for the UK: if you assume that economic growth was around 12 months behind the US when the economic collapse occurred then you have one year’s less reserves, or cushion, to take up some of the slack – without any corresponding slackness in the over consumption of debt.

Europe will always be better insulated from economic slumps due to the 11 (original members) diverse economies making up its currency. That’s not saying the individual participants in the currency will be less affected by a downturn as some will suffer much greater than if they had their own free floating currency to take up the slack. Think economic slowdown, currency is sold, exports are cheaper, travel and tourism is more affordable – i.e. the best stimulus effect you can have for economic growth. The downside is that currency fluctuation does have an impact on dissuading inward investment – if the currency is likely to slide the investment chosen really has to outperform to take up the currency risk.

The trade off is that life (or economies) is a bit like life on tranquilisers – you are never going to experience the lows, or highs that could be achieved. The rise of the Euro is a bit of an anomaly; at the moment global risk appetite has returned in some small quantities. The buying of the higher yielding, higher risk currencies has continued at almost the same pace as it did during the no-holds-barred days of early 2008. Risk has returned, perhaps with not the same volume of cash behind the bet, sorry, investment, but it is back. So why buy a diversified currency – the Euro? You might have to throw in why buy the Swiss franc and Japanese Yen with that statement.

Ordinary logic has safe currencies a buy when you are looking capital protection and limited returns; high yielding secondary currencies a buy when risk appetite is high. How do you reconcile the two? I don’t have the answer.

If you want a very simple view then think Communism and Capitalism. Communism wants an equal world, everyone has exactly the same. Capitalism is a more Darwinian approach, survival of the fittest, best innovation and ideas wins out. The Euro is championed by the former, the dollar by the latter.

The global world pendulum has swung into the equality for all, after perhaps being in the survival of the fittest for too long. All I know is volatility is good for business!


Disclaimer: The views expressed are the opinions of the writer and whilst believed reliable may differ from the views of Butterfield Bank (Cayman) Limited. The Bank accepts no liability for errors or actions taken on the basis of
this information.




Money Markets: By Butterfield Bank’s Phil Turnbull