Despite what any firm or FX expert might claim, nobody knows what is going to happen to any given currency in the future – or even from one day to the next.
There are many occurrences going on this summer in the political arena… and we all expect this ongoing uncertainty to continue, which will inevitably result in volatility for major currencies.
An increasing probability of a no-deal Brexit has brought the pound to one of its lowest levels since the Brexit vote. Despite a strong start to 2019, it has managed to sink to the bottom of the performance chart for the world’s top 10 major currencies. Unfortunately, the election of a new Prime Minister is unlikely to provide more certainty. It is still a mystery whether either candidate could negotiate a new withdrawal deal, which the EU has said is not up for negotiation. If a new deal cannot be reached, what will the British Parliament do?
A weak currency is not necessarily a negative thing for certain economies, as it can help increase a country’s exports and GDP, but people with savings in GBP and expenses in a different currency are probably concerned in this scenario.
Especially the USD and the euro are at the mercy of trade war tensions and possible interest rate cuts, amongst other factors.
According to Fitch Ratings’ global head of sovereigns, James McCormack, the trade war between US and China could possibly turn into a currency war moving forward: “I do not want to suggest that the trade war is going to become a currency war – but it could. There’s an increased amount of discussion on how the US could influence the value of the dollar.“
Aside from Brexit and trade war tensions, the EU has had its own problems. The election of Ursula von der Leyen as President of the European Commission has been a controversial process. The battle was significant because the method for selecting presidents changed in 2014, when the European Parliament launched a new system that it assured would democratize the E.U. While it looks as though the newly elected leaders won’t bring any radical transformation, the elections themselves have exposed some friction between member states.
With the slowdown of the European economic growth, it is believed that monetary policy can’t maintain the economy by itself. European ministers have said that some specific countries should raise their public spending in order to support the Eurozone… more turbulences are coming.
What is sure is that whilst equity market risk is ever present, it can pale into insignificance when compared with the risk of holding the wrong currency. As a broad rule of thumb, you should aim to match assets and liabilities with corresponding currencies, so if you plan to retire, for example, in a country which has the Euro as its currency, you should aim to hold the bulk of your income-generating assets in Euros.