Time to hedge your bets

In­su­la­tion from an un­cer­tain global eco­nomic fu­ture makes sense

The Herald Business - - Professional Brief -

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.

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