Dan AtkinsonAutumn can be a tricky time on foreign exchanges, with traders apparently returning from their summer breaks with a mind to pick on weaker currencies. Sterling was devalued in November 1967 and took a battering in September 1976, while Europe’s Exchange-Rate Mechanism, a forerunner to the euro, nearly broke apart in the autumn of 1992.
So, as October draws to a close, which were the big losers on currency markets – and why should we care at all?
To take the second question first, sharp downward currency movements matter, and not only to those living in the country concerned, for several reasons.
Of concern to everyone
One is that depreciation may make that country’s exports more competitive, because they will be cheaper when priced in local currencies. This could damage our own trade and is frowned upon in official circles when it is suspected the depreciation has been deliberately engineered in order to take a bigger slice of world markets.
This is known as a “beggar my neighbour” devaluation.
Another reason is that the decline of that currency against our own is, by definition, an up-valuation of our own currency, adding to the pressure on exporters. An engineering company, for example, may find its products costing 5 per cent more when shipped abroad after a 5 per cent devaluation.
A third reason to care would arise if the falling currency were your own. Imports are going to become more expensive and prices in the shops could rise. Following on from this, the cost of foreign-bought components for industry may also go up.
To bear down on inflation, the central bank may put up interest rates, making mortgages and business loans more expensive.
In short, a drop in a currency’s value is something that ought to concern us all.
Yen is the big loser
Before looking at the big losers in the past month, it is important to remember that with one exception – which we’ll come to later – currencies are priced in other currencies. One currency’s rise is by definition another currency’s fall, and the foreign exchange market is a zero-sum game, in contrast with shares or commodities.
So, let’s look at losses during the past month among some of the big currencies, with rates as of October 24 compared with those for September 24.
The dollar lost 1.1 per cent against the euro, falling from €0.9076 to €0.8974, and the euro lost 2 per cent against the pound, down from £0.8819 to £0.8635.
Against sterling, the dollar was also lower, down 3.1 per cent from £0.8004 to £0.7748, and the yen slipped 3.2 per cent against the dollar, from $0.0093 to $0.0090.
None of these, however, made it to the final two big losers. In second place was the yen against the euro, down 5.8 per cent from €0.0085 to €0.0080 and the first place went, again, to Japan’s currency, with the yen down 6.7 per cent against sterling, from £0.0075 to £0.0070.
Traders ought to bear four things in mind when assessing the importance of these figures.
One is that a single month’s trading, while significant, especially at this time of year, may give only limited information about the likely path of longer-term trends.
The second is that because currencies are priced in other currencies, it is important to identify the cause of one denomination’s decline. Is it, for example, yen weakness or is it euro strength? If the latter, the yen’s depreciation is telling you very little about Japan’s economic prospects.
The third is that no currency trend lasts indefinitely and that fallers eventually become risers. For example, in the 20 years 1985-2005, sterling went from an all-time low of $1.06 to about $2 on the eve of the crash.
Gold the big exception
Similarly, finance ministers met in the Plaza Hotel in New York in 1985 to damp down a soaring dollar, not least because US exports were being strangled. They were so successful that they had to reconvene two years later in the French finance ministry in Paris to stop the dollar falling too much.
This leads to the fourth point, which is that currencies are intensely political financial instruments. Even when, as now, most governments in the developed world are not trying to fix or manage exchange rates, currencies are susceptible to permanent political influence, from movements in central-bank interest rates to changes in governments.
We mentioned earlier that foreign exchange is a zero-sum game which means that all movements up or down at any one time must net as zero, with winners cancelling out losers. There is, however, one monetary asset that stands as the exception to this rule: gold. It is the only asset against which all currencies can rise or fall at the same time.
Trade Gold Spot CFD
So, how have our currencies performed against bullion during recent weeks? Bear in mind that the higher the gold price in currency terms, the weaker that currency is against gold.
On this measure, the dollar – traditional unit for gold pricing – did well. On September 25, an ounce of gold cost $1,530.85 but by October 25 that same ounce could be had for $1,488.85.
Sterling also put in a creditable distinction. On September 25, you needed £1,234.63 to buy an ounce of gold, but by October 25 that price tag had shrunk to £1,170.95.
The euro is well up against gold, from a price per ounce of €1,391.53125 on September 25 to €1,353.24257.
The yen’s value against gold has strengthened slightly, from 164.160.71 yen an ounce on September 24 to 163,628.14 yen on October 25.
To sum up, foreign exchange markets are no place for those of a nervous disposition. Winners and losers can change places at dizzying speed and for each of the former there has to be one of the latter. Some yearn for a return to the fixed exchange-rate regime in place from 1945 to 1971, but those days are unlikely to return.
Which, if you are trading foreign exchange, is good news, given that fixed rates would give you nothing to trade.
