Transcript: The Best Way to Trade Currencies

Published in Investing on 1 June 2011

David Kuo talks to Mark Ackroyd from Corporate FX.

You can listen to or download this podcast here.

 

David:

This is Money Talk, the weekly investing podcast from the Motley Fool. I am David Kuo, if you are wondering if the US dollar could fall through the floor, or whether the Aussie dollar could carry on rising, or whether the Chinese government could bow to American pressure and revalue the renminbi, then stay tuned, because I know a man who may know. He is Mark Ackroyd, market strategist from Corporate FX. Welcome to Money Talk, Mark.

Mark:

Hi.

David:

Corporate strategist, currency corporate strategist?

Mark:

It sounds glamorous, doesn't it?

David:

It does. Now, I want to ask you something. As a currency strategist, do you get asked the same questions that I do sometimes, and that's generally from people who are about to go on holiday, and they want to know whether or not they should buy their US dollar or euros now, or maybe leave it until next week?

Mark:

Yeah, I think I'm the first person my friends call once they've booked a holiday. It's a trip to Florida in three months, Mark – am I buying my $500 now, or do I wait until the airport? – and they expect me to get it right every time.

David:

The thing is, that is probably the most difficult question and the toughest question anyone can ask you, because if you get it wrong, you get egg on your face, and you've ruined somebody's holiday.

Mark:

Exactly.

David:

If you get it right, you go – yeah, you know – I knew that all along anyway.

Mark:

It's my job, so I should do, yeah, exactly.

David:

Exactly. So that is forecasting currencies on a short-term basis, but how difficult is it to forecast something on a slightly more longer-term basis? Is it easier or is it harder than short-term forecasting?

Mark:

It's all difficult. Long term obviously is very tough, because there's so much uncertainty, and there are so many factors, if you're looking at currencies, so many factors that impact the direction and performance of a currency that today we haven't got a clue what's going to happen in three months, six months. You look at geopolitical events – the earthquake in Japan, who knew that was going to happen? That had a big impact on the yen. So you'd probably say it's slightly easier in the short term, because there's a little bit more certainty – you know data is coming out for certain economies and what impact that might have on the currency, and who's speaking about what, what they expected to say, when's the next interest rate decision – all those sorts of things that affect and impact a currency and its direction.

Over six months, how do we know? So many things crop up that are unforeseen at the moment. It does make it slightly more interesting.

David:

Let's have a look at something a bit more specific, and that is the US dollar and sterling. People in the field, in your field, will call it cable – why is it called cable, by the way?

Mark:

It's called cable because, a long time ago, I don't exactly know when – I think it was in the 19th century.

David:

Before you started?

Mark:

Before I started, that's for sure, yeah. They laid a cable between the UK and the US, and that was how the price for sterling dollar was synchronised between the US and New York and London markets. So that's why it's called cable.

David:

It's as simple as that?

Mark:

Very simple, yeah.

David:

So nothing particularly mysterious about why it's called cable?

Mark:

No, unless you know something I don't.

David:

I know nothing, Mark – I know nothing.

Mark:

But that's why, so I don't know how long it's been called cable for, but that's why it's called cable.

David:

OK, so let's have a look at some of the factors that could affect the value of the US dollar. Economic growth – is strong economic growth good for a currency, or is it bad for a currency?

Mark:

I mean, generally it's good for a currency. Economic growth increases the confidence in that economy. Consumer confidence goes up, investor confidence goes up. So you're likely to see increased foreign investment into that economy – that buoys the currency. Yields probably go up. You would almost always say that positive economic growth is good for a currency.

David:

So what about interest rates? Are interest rates good for a currency? – high interest rates, I mean, or is it bad for a currency?

Mark:

Up to a point, it's good. High interest rates generally means higher yields, which generally again promotes investment into wherever we're talking about. The higher the yield you're likely to get from holding the money in a particular currency, then the more likely you are to invest there. So again, that is likely to strengthen that particular currency. 

So up to a point, certainly, high interest rates are pretty good for a currency, and that's why you see, when you're looking at markets, day in/day out, you see around interest rate decisions, you see currencies become very volatile. Generally, we saw the eurozone increase their interest rates in the last couple of months. The immediate impact of that was the euro strengthening up, and that's exactly what we just discussed.

David:

So that would kind of explain why the Australian dollar is so strong, because it's got strong economic growth. It's got all these mining companies out there, and it's also got relatively high interest rates. So that is probably the reason why lots of people are piling into the Australian dollar.

Mark:

The interest rates have certainly helped. There's a couple of reasons for the Australian dollar. Commodities is a huge thing at the moment. You look at some of the strongest currencies around, and they're commodity-based currencies. They're the Australian dollar, they're the Swiss franc, the Canadian dollar as well. There's been a real rally on commodity currencies in the last year or so, I'd say. Really, it's commodity-driven, the Australian dollar. High interest rates has definitely helped. If you've got some cash available, why would you hold it in sterling rather than Australian dollars? – you're going to get a much better interest rate in Australia.

David:

Are you suggesting that people pile into the Australian dollar, then?

Mark:

I think the trend might continue, actually. I do think we might see the Australian dollar continue to strengthen up. If you're looking at the relative strength of economies, currencies at the moment, the Australian dollar's one of those that I'd be fairly secure in saying is going to be strong for a while.

David:

So does the same apply to, say, the Canadian dollar then? Presumably Canada is another country that is doing reasonably well? So would you suggest that people pile into the Canadian dollar in the same way as they're piling into the Australian dollar?

Mark:

Again, within reason. I think you're fairly safe at the moment to categorise commodity currencies as being relatively strong, and remaining so in the short-to-medium term. So in a sort of simplistic view, I don't see any reason why the Canadian dollar won't remain fairly strong, as with the Australian dollar, the South African rand as well. The Kiwi dollar's been strong. Whether they stay quite as strong as they are now, it's difficult to say, but I don't think we're going to see them falling through the floor.

David:

OK, so we've had a look at economic growth. We've also had a look at interest rates, and we've also had a look at some of the commodities, or rather the industries within that particular country. Let's have a look at national debt now. The national debt in the US is almost hitting its ceiling of 14 trillion US dollars.

Mark:

It sounds a lot, doesn't it?

David:

Well, I think it is a lot!

Mark:

It is a lot.

David:

I think it is an awful lot. Now, how could this impact the US dollar?

Mark:

Clearly, it's not a good thing for the US economy, and you therefore think not a good thing for the US dollar. The dollar has been fairly weak, over the last three months or so. It actually, if you're looking at the last couple of weeks actually, it's performed fairly well, and it's recovered some of the losses against ... if you look at it against sterling and the euro particularly, it's recovered a little bit. 

But the US dollar's fairly weak. Debt position has got a lot to do with that, and the US monetary policy's also got something to do with that as well. I think we can see the dollar remaining fairly weak. Their debt position isn't going to improve overnight. It might not improve for a long time. Whilst interest rates are kept as low as they are in the US, then I think the signs are not particularly great for the US dollar.

David:

So we've been looking at the US dollar in isolation, but nobody actually trades a currency in isolation.

Mark:

You trade a pair, yeah.

David:

You trade a pair of currencies. Let's have a look at sterling at the moment. Let's have a look at the British pound, and say, what are the factors that could affect the UK pound? So starting with something like economic growth – what can you say about economic growth here in the UK, and how that will affect sterling?

Mark:

Well, it's not great. The latest growth figures came out at .5% growth, which was at least positive. For quarter one this year, we recovered from quarter four last year, where we negative growth, and there were concerns that we might see double-dip recession. Another negative figure in quarter one this year would have meant that.

So we've moved in the right direction, but, if you look at it over a six month period, that's neutral growth, and that's not great for an economy that's really trying to find its way out of this recession, and depending on what you read and who you listen to, governments apparently are fairly happy with how things are going.

So growth at the moment is certainly a concern, and I think we still need stimulus in the economy. I don't think we're out of the woods by any strokes of the imagination. There are some sectors in the economy that are still really struggling.

David:

Such as?

Mark:

Construction is a massive one. The construction figures were down 4.7%, which is terrible. Construction's had a tough few years. It's not just a recent thing.

David:

Retail's not doing that well either, is it?

Mark:

No, retail's not. Retail sales have been particularly poor for this year. I've been speaking to clients of ours in the retail sector, and they've had a slow start to the year. Consumer confidence is just not there at the moment. Disposable incomes are getting squeezed. People don't have as much money to spend on the high street as maybe they did two or three years ago, so retail sales are poor. The figures suggest that. Again, I don't think that's going to turn around overnight, and retail figures make up two-thirds of our growth as an economy. So we need to see an improvement in that before we can have any sort of confidence.

David:

People can't afford to spend money though, Mark.

Mark:

They can't at the moment.

David:

So what is doing well in the UK? – we know that construction isn't doing well, retail is almost on its knees at the moment. So what is doing well in the UK?

Mark:

Well, export industries are doing OK, the pound being as weak as it has been certainly helps that. Now whether the government are pursuing a policy of sterling weakness to help this export-orientated growth and recovery from recession or not, is an interesting argument. But certainly the pound being as weak as it has has helped export industries. But there's no single industry out there that I'd look at and go, that's really performing excellently, and we can hang our hopes on that pulling us out of the recession that we're in. With some of the issues that we've got at the moment, I think that there's a long way to go.

David:

Now, I want to have a look at sterling in the same way that we were looking at the US dollar, and you'll understand in a few minutes why I'm actually doing that. So let's have a look at interest rates in the UK. What is likely to happen to interest rates in the UK over the next six months or so?

Mark:

Well, it depends who you listen to.

David:

Well, if you listen to me, it's got to go up.

Mark:

Yeah, you said that to me three months ago.

David:

And it should go up – well, the reason why I said it should go up was because I said inflation was a problem, and I don't think I was wrong.

Mark:

No no – I completely agree.

David:

And there were some people out there who said, inflation is not a problem, including the Bank of England, kept on saying, inflation is not a problem, and yet I was banging on and on about inflation being a huge problem. The reason why I said that was because I just talk to the man on the streets. I just talk to ordinary people, and they're saying, things are so expensive. But you said it hasn't been reflected in the ONS's own indexes, which include the RPI and the CPI. That was the reason why I said inflation was a problem. But anyway, over to you, Mark.

Mark:

Inflation is a problem. The latest inflation figures are out, 4.5%. That's way, way above ...

David:

And 5.1 on the RPI – 5%, over 5% on the Retail Prices Index.

Mark:

That's way above any sort of target the Bank of England set, obviously. I don't think that many people do genuinely believe inflation isn't a problem. There are a number of factors ...

David:

Have you spoken to Mervyn King? – he confirmed, saying it wasn't a problem, and I kept on saying it was a problem.

Mark:

Was he listening?

David:

He wasn't listening. He doesn't listen to Andrew Sentance – why should he listen to me?

Mark:

There are factors to bear in mind, though. I mean, I do think that it's fair to say some of the inflationary pressures we're seeing at the moment are temporary.

David:

You know that's nonsense, Mark!

Mark:

No, I think it's true. The oil price where it is and where it has been, isn't sustainable.

David:

And why should the oil price come down, Mark? Give me one reason why the oil price should come down, when we have China which is expanding at the rate of 9% a year; India is just drinking oil. Why would oil prices come down as a result of that?

Mark:

Oil price is cyclical, so supply isn't an issue at the moment. There were some colleagues of mine that were, they listened to a talk by the chairman of Chevron, and he was saying that the reality is that it doesn't make sense for some oil-producing areas to produce oil until oil gets to a certain price. It gets to that price – suddenly they all start producing oil. That would automatically move the oil price lower. In the short term, there isn't a supply problem with oil. Now, I'm not an expert in oil supply, but certainly a lot of what I've been hearing from that sort of industry suggests that that is the case.

And so you're absolutely right – I don't think the demand for oil is going anywhere – that's not going down. But I personally don't think the oil price in the medium to long term stays as high as it is.

David:

So what about the food price? Again, I refer to the rising middle class in India and China, and they are just consuming food, because they want to eat the same things that we've been eating over the last 50 or 60 years. They want bread, they want good quality meat, they want soya. So therefore, as a result of that, they are bidding up the price, and we are having to pay for that, because the Chinese can afford to buy it.

Mark:

It's true – demand for all of these things is only going up.

David:

So why should inflation come down then, Mark?

Mark:

I think it comes down because I think some of this is temporary. I'm not suggesting this is ... we have some embedded inflation. Inflation is here for good, unless we do something about it.

David:

Well, I'll give you one example of embedded inflation, and that is recently I was on the radio show with Bob Crow on the other side. Bob Crow was crowing over the fact that he managed to get a 10% pay rise for his members, the members of his union. 10% pay rise equates to 5% a year over two years. That is embedded inflation – I mean, there is no way, after two years, that he's going to say – oh, let's have a cut in wages. That is already embedded. Now the other unions see a 10% pay rise over two years by the NUR – are you telling me that they're not going to ask for a similar pay settlement?

Mark:

They probably will.

David:

And then suddenly you get embedded inflation, don't you?

Mark:

Bob Crow is, of union leaders, is probably the most high-profile. We all pick up the paper on the way home and read about the prospect of tube strikes and the reasons behind that, and love him or hate him, I know what most of us do ... yeah, he's high profile. Although I don't know other trade union leaders, I can only assume that they will follow suit, because it's very well publicised, what's been going on. So I think inflation is a massive concern, and what do we do about it? I'm kind of pleased that I'm not the one that has to make the decisions, to be honest.

David:

But don't you agree that, at some point, the Bank of England will have to increase interest rates?

Mark:

Yeah – absolutely, they will do, but, and we've just talked only a couple of minutes ago about growth and the fact that over six months we've seen neutral growth, and double-dip recession, and how bad that would be for the economy. There was real concern about double-dip recession, and as an economy us losing our triple A credit rating. What impact does that have on London, the financial hub of the world, losing a triple A credit rating? That is a real problem for the UK.

And so inflation is a problem, but you can't just increasing interest rates when there's the prospect of negative or neutral growth. We still need some stimulus in the economy, and for that reason I don't think we're going to see interest rates going up in the short term. The recent inflation report released by the Bank of England suggests that we'll see one interest rate increase before the end of the year, probably in quarter four of this year, a quarter of a percent. I believe it was priced in for a one percent increase over the course of next year. So one-and-a-quarter percent by the end of 2012.

David:

That's nothing, Mark – a quarter percent isn't going to have any effect whatsoever on inflation.

Mark:

You have to start somewhere.

David:

What – a journey of a thousand miles starts with one step! OK, let's have a look at the national debt now, because we've looked at economic growth. We've also looked at interest rates. So let's have a look at the UK's national debt. National debt is likely to increase over the next five years, before it starts to come down. The government is saying that it's trying to reduce the budget deficit, but every year we have a budget deficit. It means that that is added on to the national debt pile. So what can we say about the impact of the national debt on sterling?

Mark:

Well, it's not a good thing, that's fairly clear.

David:

Are you a man of understatement, or something? It's heading towards 100% of GDP, isn't it?

Mark:

It is, I mean we have got austerity measures that have been put in place and are being applied, and we're looking at cutting budget deficit. That's a fairly active and well-publicised policy that we're pursuing now. So you hope that that has a positive impact on the overall national debt. I agree with you, though, that we're not going to see this reducing in the short term. It has an impact on sterling – we're not the only economy in that position.

David:

So that makes it OK, then, does it, Mark?

Mark:

It doesn't make it OK, but as you said earlier, when you look at currencies, you look at them generally relative to another currency. And so that – it doesn't make it OK that the UK have dropped.

David:

To try and find someone who is as ugly as you, or uglier than you – is that what you're suggesting?

Mark:

That's the only hope you've got, I think. Pick on the US, and you're OK. You look at them relative to other economies, and we're an ugly sister, but we're not necessarily the ugliest at the moment. So it will have an impact on the pound. I think the pound at the moment is in a little bit of limbo. I don't have a clear direction one way or the other, but I think there is a lot of uncertainty still around the UK. I could form a pretty good argument for why the pound moves lower, and you could also form a pretty good argument for why the pound, certainly against some other currencies out there, performs fairly well. The interesting thing about currencies, there are so many factors that affect them. We're covering some of them now, but there are a whole host of them.

David:

OK, now you waved the red flag in front of me just a few minutes ago. You said, let's have a look at a pair of currencies, and you floated the US dollar right in front of my very eyes here. So let's have a look at sterling and the US dollar. Given what we know about the economic growth in the two countries, given what we know about the interest rate policies, and also the national debt in these two currencies, where is sterling going to go against the dollar?

Mark:

I think this is maybe one of the good news stories for the pound.

David:

Really?

Mark:

Yeah, I do. I think that generally I see the pound being relatively stronger than the US dollar.

David:

That's good news? – surely that's not what the government wants? Surely the government wants sterling to be as low as possible. I've been out there saying to people that Europe, America and the UK are on this race to the bottom to see who can get their currency the lowest.

Mark:

Well, my clients that are importers don't agree with you, that's for sure, and there's a lot of those. They certainly don't want to see the pound falling any further. It's been fairly tough for them, over the last few years. I see the pound performing fairly well against the US dollar in the medium term. I think the US monetary policy at the moment suggests that interest rates are going to be kept low for an extended period.

David:

The same with us, though?

Mark:

The same with us, but I think probably, if I was a betting man, I'd bet on us increasing interest rates before the US. That supports the pound, as long as it happens that supports the pound. Certainly the sentiment in the market at the moment is that that's going to be the case. The debt position in the US is nothing short of terrible at the moment.

David:

The same as us?

Mark:

Yeah. Strangely, we always used to think that the UK economy was about six months behind the US economy, and that we followed, cyclically we followed more or less the same as them. I think actually it's not quite the same any more. I don't see the US as being ahead of us, and so I don't see any short-term resolution for either, but I think the nature of the problems at the moment are larger in the US than they are here in the UK.

David:

So as far as the two currencies are concerned, do you reckon that sterling will rise against the US dollar in the medium term?

Mark:

If we're looking at the rest of this year, that sort of timeframe, I would say so.

David:

OK. About three weeks ago, we had Robbie Burns, and he was talking about people who spread bet on currencies. The one advice that he had for people who'd spread bet on foreign exchange, or forex, was, don't do it, right! What are your views about people who spread bet on foreign exchange? – given that you're in the trade.

Mark:

Yeah, we're in the trade, and we're not in the spread betting trade. My clients are large corporate clients whose currency exposure comes as a by-product of what they do day-to-day, so we're not speculating for them. Of course, we're in the markets daily, and we're giving a view and some guidance in terms of where we feel certainly currencies are going, and when's a good time to buy them and when's not. Spread betting on currencies is a risky business.

David:

Why is it risky, though?

Mark:

Well, spread betting in general is, isn't it?

David:

But lots of people do it.

Mark:

They do. It's very accessible, and if you have a keen interest in financial markets, and there's a lot of information that's available to you fairly easily – what the quality of that information is like is another story, but there's a lot of information that's available to you. I think, if you feel like you have a grasp on the UK economy, or the eurozone or the US, what you can think is that has a knock-on effect in terms of the performance of the currency. Surely if I think the UK is in this position, and is going to do this over the next six months, then I can relate that to the pound's performance. Now the problem is, there are so many factors that influence the direction of the currency or a currency pair, depending on which way you're looking at it. We've discussed some of them: interest rates, monetary policy, growth figures, debt – they all have an impact. But we also said at the beginning, there are so many variables that we just haven't got a clue about.

David:

Such as?

Mark:

Well, as I said ...

David:

Unemployment, I suppose, is another one?

Mark:

Yeah, but even something just as ... even more unpredictable.

David:

Like international conflict?

Mark:

An earthquake, snow – anything like that that comes out of the blue that we don't have a clue about, that can have a real impact on productivity in a country. This ash cloud – what happens if ...

David:

That wafts over here, you mean?

Mark:

Well, what happens if that hangs around for a few weeks, and what impact is that going to have on the airline industry? Who is then affected most by that? Who's most exposed to that, and what does that mean in terms of currency? Everything has a knock-on effect.

David:

So what you're saying is, for instance, if the cloud impacted tourists coming here in the UK, and it affected retail sales in some way ...

Mark:

That affects retail sales, then what does that mean for our quarter two growth?

David:

Economic growth.

Mark:

That's something that, when're you trading, if you're trading today and you've got a sterling trade, there are certain things, you can sit there and say, right – this is the picture at the moment, and therefore my view is x. But two days ago, no-one was talking about an ash cloud, so you couldn't base any fx trade on there being an ash cloud in the next few weeks. And so that's the sort of things which makes currencies very difficult. It's not exclusive to currency, obviously. All sorts of markets are impacted by things that we can't see. If it was easy, then everyone would do it.

David:

We'd all be millionaires.

Mark:

Yeah, I'd be on a beach somewhere. But it's difficult. I think it's difficult because there are so many variables and so many factors that make up what's going on in the currency market.

David:

But despite what you've just said, there are still lots of people out there who, for instance, buy European shares, they buy US shares. One of the reasons why people might be tempted to spread bet is because they want to cover their positions. In other words, they want to ensure that any dividends they receive from their US investments, or the US investments itself, doesn't actually fall as a result of a declining US dollar. 

One example is, a couple of weeks ago I spoke to a gentlemen called Khiem Do from Baring Asset Management. He was talking about how great economic growth in certain parts of south-east Asia were. I picked him up on one particular country, I said Vietnam – great stuff, yeah. Go and invest in Vietnam, only to find that the Vietnamese dong has been devalued four times in a short period of time. Now that is going to absolutely cream the investments that you have. Even though economic growth might be astounding, the fact that the currency has fallen, it means that any investment you have would be worth less today than it was a year ago. So what can Corporate FX do to help people who might have significant exposure to the American market, or to the European market?

Mark:

A lot of what we do is exactly that. We hedge their positions, whatever the amount is. You might have an exposure ...

David:

You're not talking about spread betting, are you?

Mark:

No, no. There are forward contracts that we can take out which fixes a rate for a currency pair. So you might have an exposure of 50,000 euros in European investments today. You know the value of the investments today ...

David:

Have you been looking at my portfolio?

Mark:

Is that all? – I would have thought it would be more than 50.

David:

OK, carry on – no, that's just one share.

Mark:

Yeah, and so you know the value of those assets today, in terms of the euro value. What you do with that, well what we can do is, what is available, is you say, right – I want to fix the rate between sterling and euro at the moment. Now, the euro rate isn't great, but if you want certainty, then that's what you do. You can enter a contract where you don't settle immediately. You might give a timeframe of six months or a year or however long you need, but you can fix an exchange rate based on today's rate that you have for that term, however long you decide that term to be.

David:

So you would be selling the euro at today's rate?

Mark:

Let's say you needed, in the future, to purchase euros for any sort of investment. You could sell sterling, and buy the euro at a fixed rate today. You don't physically deliver on those funds straight away. You might say, right – well, I know the term of my investment is six months. So you can fix a contract over six months, based on the exchange rate today. So whatever happens to the exchange rate over that six month term, when it comes to you paying for the investment that may have gone up or gone down, you know the exchange rate for the amount that you agreed on in the beginning is fixed.

David:

Is that contract binding?

Mark:

Yes.

David:

OK. And if you welch on the contract?

Mark:

Obviously, you're dealing with us, there's a trading agreement that you sign. We go through some compliance procedures. When you agree to this contract, you're liable for what you've agreed to do. So 50,000 euros, for example – you've agreed to buy 50,000 euros at a fixed rate over six months. Now, our contracts are very flexible, so actually if you wanted to take delivery before the six months, you can do and there's no impact on your price. It remains the same. So what you've effectively bought yourself is a window of six months to use the currency at the rate agreed.

David:

So how many people who are private investors actually do this through your company?

Mark:

Quite a lot. So we have different strands of our business. The one which I work for is dealing with commercial clients, so large corporates, companies that manufacture in the Far East and therefore they sell in the UK. Simplistically, they sell in the UK, they manufacture in the Far East. They pay suppliers out there in US dollars to keep it easy again. They might buy 50 million dollars over the year to pay for whatever they're bringing in, and we help them to buy those dollars at the right time, do exactly what we've just talked about; hedge their position, so that their profit margins are protected. Regardless of whether the sterling dollar's at 140 or 180, their profit margins, when they go through budgeting process, are protected there. 

We have our private client division as well. There are people there that have investments that they're looking to hedge the currency risk for. A lot of our private clients will be people that are buying a second home abroad, and today they decided they want to buy a house in Spain for 200,000 euros, and they're concerned about, over the next two years which it might take to build the house or whatever, that the euro rate goes through the floor and that it ends up costing them 5% more, or whatever it is. So we do a lot of work with those sort of clients, that are buying an asset in a foreign currency, and they want to fix the price for that asset in terms of the exchange rate, so that they know that if they can afford to buy the house today, they'll be able to afford to buy it in two years, because the exchange rate has remained the same.

David:

Can I end by asking your thoughts on the Chinese renminbi? – that is the Chinese yuan. Now, we know that America wants China to revalue the yuan. What are the chances of China ever revaluing the renminbi, or the yuan, to appease the Americans and to help the West out of the problems that we are in?

Mark:

I think there's a high chance of them revaluing. I think there's next to no chance of them revaluing to help out the US dollar, or anyone else. China will revalue the renminbi when China sees fit, and when it's in their interest to do so. I think they've shown, for quite a while now, that they are not answerable to anybody. They'll follow their own policies and I'd be very very surprised if they turned round to do the West a favour by revaluing their currency. I think they'll do it – it's inevitable in my view that they will do it. I wouldn't want to say in what sort of timeframe – it's quite difficult to nail that down, but I think it will happen. But I'm as sure as I can be that they won't do it to do us a favour.

David:

Right. I say that was my final question – I do have a final final question, and that is with regards to the US dollar. Are the glory days of the US dollar over?

Mark:

I don't think it's over, but we will definitely see diversification to a greater extent that we've seen before. The US dollar isn't going to be as dominant as it has previously been. We've seen that already. The euro's benefited from dollar weakness, because people have gone into the euro instead. As the renminbi becomes more prevalent over the years, then I think that we might see the same there. The US dollar is going to be strong, certainly for as long as we're around, I think, but not in the same way as it has been.

David:

So what is going to be the most dominant currency? – the currency that everybody will be looking to?

Mark:

But I'm not sure there will be – I don't think there is going to be one currency necessarily that everyone's looking for. I think that's where the change is at the moment, is that there's going to be a bigger basket of currencies that have more importance. It used to be the US dollar and everything was dollar-based. If you talk about glory days, that's what you mean there. I don't think there's going to be a replacement for the US dollar. I think that we're just going to see some of that power from the US dollar trickle down into different currencies. As I said, the euro, we've started to see it happen with the euro already.

David:

So are you saying that currencies such as the rupee, the yuan, the yen, will be just as important – including, of course, the euro as well?

Mark:

Over time. Whether they're just as important or not, I don't know, but over time they're going to certainly be more important than they are now, and fill some of the gap that I think ... the dollar's going to lose some ground, and I think that needs to be picked up from somewhere, and just the currencies you've mentioned there, I think they're going to start filling some of those gaps.

David:

And what are the chances of the euro ever breaking up and allowing countries such as Greece to leave the euro?

Mark:

There's a chance, and it's been talked about fairly frequently in the last year or so.

David:

A bit too often for comfort, I think?

Mark:

Yeah, I don't see it happening. I think it's fundamentally been quite a successful experiment. Germany would certainly say so, and ultimately what's important in the eurozone, Germany – they're the big driver in the eurozone. If they're doing well, then the eurozone survives. They are doing well at the moment. The euro as a currency has been good for them. Whilst that remains as it is ... there are huge problems in the eurozone – Greece, Spain, Portugal, Ireland, Italy. They have some real problems. Anyone that reads a newspaper, anyone that reads a newspaper even every now and then knows that. So why has the euro not been weak over the last six months? Well, Germany's the main reason why. I don't see that changing any time soon. So I don't think the eurozone splits up, I don't think the euro splits up. I think it's here to stay.

David:

And are you grateful that the UK is not in the euro? – as a currency trader, you must be.

Mark:

My job would be more difficult if it wasn't, so yes.

David:

You have one extra currency to trade, exactly!

Mark:

Exactly, yeah. No, we wouldn't be doing as much business if we were part of the euro. So I think I have to say yes to that one.

David:

Otherwise you'd be out of a job, Mark.

Mark:

Exactly, yeah.

David:

Well, thank you very much for coming in today, Mark. I have one more thing to do before we end today's podcast, and that is to try and find a quote to sum up today's podcast. Today's quote comes from the American film producer, Sidney Lumet, who said: "All great work is preparing yourself for the accident to happen." Is that what forex trading's all about – preparing for the accident to happen?

Mark:

I think it sums it up quite nicely, yeah.

David:

Thank you very much. OK, now this has been Money Talk. I have been David Kuo, and my guest has been Mark Ackroyd. So thank you very much, Mark, for coming in today. Mark is from Corporate FX. If you have a comment about today's show, please post it on the Money Talk webpage, which you can find at fool.co.uk. If you have a suggestion for future shows, please email me at moneytalk@fool.co.uk. Until next week, happy trading!

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

 

There are no comments yet - why not be the first?

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.