CURRENCY MANAGEMENT: TACTICAL VERSUS STRATEGIC. Vimal Gor BT Investment Management Daniel Been Advance Asset Management (Macro Currency Group)

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1 CURRENCY MANAGEMENT: TACTICAL VERSUS STRATEGIC Vimal Gor BT Investment Management Daniel Been Advance Asset Management (Macro Currency Group)

2 BTIM Income & Fixed Interest FX strategy debate Vimal Gor 2 May 2013

3 Definition Strategic allocation Long holding period Over economic cycles Based on fundamental factors Tactical allocation Short holding period Behavioural and political factors Exploit market inefficiencies 3

4 Strategic allocation PPP & Interest rate differential Valuation approach: Covered interest rate parity The same good around the world should have same value Forward exchange rate is expected exchange rate in the future Difficult implementation Arbitrage barriers Demand side factors Subjective valuation (preferences, fashion) Expectation Microeconomic factors on the supply side Supply chain Corporate pricing strategy High interest rate differential implies forward discount Not a good predictor of future exchange rate Uncovered interest rate parity Real interest rates in two currencies should be the same Positive real interest rate differential implies future appreciation Significant but unstable correlation Exchange rate can deviate from PPP for a long period 4

5 Tactical allocation Tactical drivers are more significant contributors to short term volatility than fundamental economic drivers. Market Focused Short term drivers Technicals Positioning Economic surprises Risk aversion 5

6 Tactical allocation Source: BTIM, Bloomberg, DB, Citi 6

7 Tactical allocation - benefits Flexible Variable time frame Numerous Indicators Pattern recognition Allow behavioural and political factors Herding Psychological levels Risk aversion Political drivers Unquantifiable events 7

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