Currency war offers investment opportunities

The so-called currency war is actually an investment opportunity, as some currencies are over-valued and others under-valued, asset managers say

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The euro has been swinging up and down over the past few days on speculation whether the European Central Bank (ECB) will join the so-called currency wars – a race to the bottom in which the world’s major central banks keep ultra-loose monetary policy in place to boost their economies, depreciating their currencies in the process.

“This currency war is an opportunity for us. You can differentiate between countries that are sensitive to the currency war and you can position your portfolio accordingly,” Carlos Galvis, fund manager of Carmignac Capital Plus (a product that is part of French-based asset manager Carmignac Gestion), said in a news conference.

“One of the positions is the short yen position because we do believe the yen is an overvalued currency,” Galvis added.

Carmignac Gestion had 46 billion euros ($61 billion) under management in 2011; assets under management increased to 53.6 billion euros last year. Carmignac Capital Plus aims to offer a return of 2% above the EONIA index rate (one of the two benchmark rates for eurozone capital and money markets) on a yearly basis, all the while targeting volatility of less than 2.5%.

In the emerging markets, Carmignac Capital Plus’ portfolio has been long emerging markets rates through Eastern European bonds – in Turkey, Russia and Poland.

“We do believe the current yields will come down because inflation will come down and also there is quite a lot of appetite for risk,” Galvis said.

Benoit Anne, a strategist with Societe Generale, believes the days when investors could just “close their eyes and go long any emerging market currency” are over.

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He is bullish on two of the smaller markets in Central and Eastern Europe, the Romanian leu (RON) and the Serbian dinar (RSD).

In Romania, Anne said there could be a new agreement with the International Monetary Fund (IMF) and the economic fundamentals were stronger, while “one of the interesting features of the RON is that it is less correlated with global risk indicators, making the currency more resilient to an increasingly challenging risk environment.”

“Going further towards frontier markets, we also remain bullish on the RSD, which is supported by stronger fundamentals and benefits from a highly attractive carry (some 0.9% per month),” he said.

Anne is short the Hungarian forint (HUF) and the South-African rand (ZAR).

In terms of risks for the global economy, Galvis said that in the short term there was still “potentially some risk around the periphery.”

“We should expect in the short term some volatility and increasing risk because of the political situation in Italy and Spain,” he said.

“More long term, we see a potential risk of an upside move in interest rates,” Galvis added. “The likelihood of US interest rates moving higher in the second half of this year is gaining momentum.”

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