Time to hedge your bets
Insulation from an uncertain global economic future makes sense
WHEN you start work in a treasury, one of the standard things the more experienced traders will tell you is ‘the trend is your friend’, meaning that when prices are rising, they tend to keep rising, and vice versa.
The past couple of weeks have certainly showed there is some truth in that old chestnut. Gold broke through $700 an ounce on May 9 – the first time it has been at that level for 25 years. It was only about a month previously that it moved above $600.
Copper, silver, platinum and zinc have all moved sharply higher in recent months – along with oil and other commodity prices. One explanation is that the developing nations, especially China, have permanently raised demand for these commodities and that supply cannot catch up, at least not in the short-term. Another is that it is driven by ‘hot money’ ie, the latest investment fad. Whatever the reason, the trend seems unlikely to reverse in the near future.
On the currency front, the first week of April saw an exceptionally strong euro move above 70p only for Jean-Claude Trichet, president of the European Central Bank, to raise doubts about the ECB’s commitment to hike euro interest rates in line with market expectations.
I suspect there may be some readers out there who wish they had sold their euro receivables forward at the start of April – if so, don’t worry, you’re not alone!
It isn’t easy for central bankers these days; the new Fed Chairman, Ben Bernanke, also seems to have a gift for confusing the markets. The possibility that US interest rates may peak at 5% has led to a sharp and sustained dollar sell-off. Sterling and most other major currencies seem set to make further gains against the dollar. It is hard to believe that only a couple of months ago, sterling looked as though it would fall below $1.70.
The market also seems to have changed its view on sterling interest rates. Stephen Nickell’s term on the Monetary Policy Committee has come to an end so there is one less inflation ‘dove’ making the decision.
There is a growing perception that inflation may be a medium-term threat – those exploding commodity prices have to feed through to some degree – and that UK interest rates may ultimately be headed up. Longer-term interest rates have already moved to reflect this re-evaluation, with five year fixed rates, for example, trading close to 5.25%.
So, all in all, lots of changes. The past month or two are proof – if any were needed – of how quickly financial markets can move. Tempting though it is to guess where the markets are headed next, there are very few people who make the right call, and fewer still who consistently make the right call.
The lesson I would take from all of this is – whether it is exchange rates or interest rates, if the current price suits you, you might as well take it, because it may not last forever.
It may also be prudent to hedge your exposure so that large fluctuations in the market do not impact upon your business. Your bank could well be suggesting ways for you to insulate your business as much as possible from factors you cannot influence or control. It is probably a good idea to listen to their suggestions.
Content supplied by Johnnie Black, head of UK treasury regions for Anglo-Irish Bank.