CURRENCY INDICES FTSE PUBLICATIONS. Q Currency Markets Review

Transcription

1 CURRENCY INDICES FTSE PUBLICATIONS Q2 Currency Markets Review 1

2 Q2 Currency Markets Review BEIJING BOSTON DUBAI HONG KONG LONDON MILAN MUMBAI NEW YORK PARIS SAN FRANCISCO SHANGHAI SYDNEY TOKYO Overview FTSE FTSE Group ( FTSE ) is a world-leader in the creation and management of indices. FTSE calculates and manages a comprehensive range of equity, fixed income, real estate, currency, commodity and non market-cap indices, on both a standard and custom basis. The company has collaborative arrangements with a number of stock exchanges, trade bodies and asset class specialists around the world. FTSE indices are used extensively by market participants world-wide for investment analysis, performance measurement, asset allocation, portfolio hedging and for creating a wide range of index tracking funds, derivatives and ETFs. FTSE is owned by London Stock Exchange Group. Cürex Group The Cürex Group is a technology solutions provider whose business objective is to provide fairness and transparency to users of foreign exchange, whether they are institutions, corporations or investors. We primarily focus on four business opportunities: foreign exchange execution, foreign exchange indices, data sales and financial product design and support. Our mission is to work in partnership with our clients to create more efficient foreign exchange investment structures, to lower transaction costs and to add unparalleled clarity to all foreign exchange activity. Headquartered in New York, Cürex is independently owned and is not affiliated with any other financial services company. In 2012, FTSE and Cürex Group launched the FTSE Cürex FX Index Series, a series of executable benchmarks, fixing rates, and basket indices for spot foreign exchange. These include over 200 currency pairs and unique equal weight currency baskets streaming in real-time, 24/5. The FTSE Cürex FX Index Series represents a new standard in transparent spot FX fixings, custom index calculation and FX execution benchmarking

3 Q2 Currency Markets Review About the FTSE Cürex FX Index Series Building blocks The FTSE Cürex FX Index Series is an innovative series of independent benchmark indices for currency baskets and underlying constituent pair fixings executable in realtime, 24/5. The index series links institutional foreign exchange with global capital markets, providing foundational valuation metrics and analytical tools for institutions seeking to approach, access, and add flexibility to currency as an attribute to all asset classes. Electronically auditable institutional FX prices 15 minute fixings 96x/ Day The FTSE Cürex FIX provides an alternative, independent benchmark for currency pairs and fixings, executable in real-time, 24/5. Values are derived from firm bid/offer quotes sourced from a majority of the world s liquidity providers in the institutional foreign exchange market. The indices incorporate numerous innovative features which set them apart from other currency benchmarks, creating new opportunities for asset owners and ETP product issuers to provide enhanced risk management and investment management tools for all capital market participants. Independent, multi-contributor price sources Anonymous price discovery in institutional FX markets 24/5 Executable real-time fixing rates FX basket Indices executable 24/5 Timestamped benchmark values A common, exchange-like transparent rule set: An exchange for foreign exchange 4 5

4 Q2 Currency Markets Review Q2 Spot Currency Performance Base Currency (Long) A currency s price is presented as a relationship between itself and a reference currency, meaning currencies are priced in pairs. To determine the value, one currency is considered to be held long while the other is considered to be held short. This reflects that a spot currency pair s value represents the exchange rate at which two counterparties agree to deliver one base currency unit (the long position ) in return for an amount of reference currency (the short position ). The matrix on this page presents the performance of 200 currency pairs for the twelve month period through 31st May. The column headings state the base currency long position, while the row headings provide the short or reference currency position. AUD CAD CHF CZK CNH DKK EUR GBP AUD CAD CHF CZK CNH DKK EUR GBP HKD HUF ILS JPY MXN NOK NZD PLN RON RUB SEK SGD THB TRY USD ZAR The data is generated from real time currency prices available from FTSE Cürex on a streaming basis. These prices differ from the myriad of indicative pricing services as FTSE Cürex rates are executable; underpinned by an actual FX marketplace that allows execution at the stated price at that moment of time. Reference Currency (short) HKD HUF ILS JPY MXN NOK NZD PLN RON RUB SEK SGD Colour = Annualized Volatility THB TRY High Low USD Value = Q2 twelve month Spot Return expressed as a percentage ZAR Source: FTSE Group, Data as at 31st May 7

5 Q2 Currency Markets Review Q2 Spot Currency Performance Top 5 Performing Pairs vs USD At any given time, all currencies are being priced against other currencies. The influence of one currency on another can simultaneously affect the prices of a third currency in which it is also being priced. For example, the relationship between the Euro and Yen can impact the price of Yen in US Dollar (which can further influence the price of US Dollars in Euro). With its role as the reserve currency, most currency transactions are priced relative to the US Dollar. Crosspairs, a pair that does not include the U.S. Dollar, may have dissimilar performance relationships from what is implied individually between each currency and the US Dollar. The charts on this page reflect the top performing currencies relative to three major developed market currencies, the US Dollar, the Pound Sterling and the Euro. The assemblage of currencies that were the strongest currencies in the world includes the New Zealand Dollar, the Israeli Shekel, the Swiss Franc, the British Pound and the Polish Zloty. What is common amongst these pairs is their relatively strong ties to developed market currencies, predominantly Europe and their lower dependency to energy and commodity related activity Jul 05 Aug 02 Sep 07 Oct 04 Nov 02 Dec GBPUSD PLNUSD ILSUSD CHFUSD NZDUSD Top 5 Performing Pairs vs GBP Jan 07 Apr 05 May Jul 05 Aug 02 Sep 07 Oct 04 Nov 02 Dec 06 Jan 07 Apr 05 May PLNGBP CHFGBP ILSGBP NZDGBP RONGBP Top 5 Performing Pairs vs EUR Jul 05 Aug 02 Sep 07 Oct 04 Nov 02 Dec 06 Jan 07 Apr 05 May GBPEUR PLNEUR ILSEUR CHFEUR NZDEUR 8 Source: FTSE Group, Data as at 31st May Source: FTSE Group, Data as at 31st May 9

6 Q2 Currency Markets Review Bottom 5 Performing Pairs vs USD Q2 Spot Currency Performance Jul 05 Aug 02 Sep 07 Oct 04 Nov 02 Dec 06 Jan 07 Apr 05 May The weakest currencies include many names associated closely with emerging markets, commodities, or political instability. For the last twelve months, the weakest currencies were the Turkish Lira and the Russian Ruble. Rand weakness reflects the soft commodity market while Lira weakness reflected a tumultuous domestic environment. Other weak performers included the Australian Dollar, Thai Baht, and the Canadian Dollar. TRYUSD RUBUSD THBUSD ZARUSD CADUSD Bottom 5 Performing Pairs vs GBP Jul 05 Aug 02 Sep 07 Oct 04 Nov 02 Dec 06 Jan 07 Apr 05 May TRYGBP RUBGBP THBGBP ZARGBP CADGBP Bottom 5 Performing Pairs vs EUR Jul 05 Aug 02 Sep 07 Oct 04 Nov 02 Dec 06 Jan 07 Apr 05 May 10 Source: FTSE Group, Data as at 31st May TRYEUR RUBEUR THBEUR ZAREUR CADEUR Source: FTSE Group, Data as at 31st May 11

7 Q2 Currency Markets Review FTSE 100 in GBP, USD, EUR, JPY Currency Impact on Global Benchmarks Market participants typically experience and measure investment performance through the lens of their local currency. Their investment experience will therefore be influenced by both changes in the value of the underlying securities and changes in the value of their domestic currency relative to currencies used to denominate portfolio constituents. GBP USD EUR JPY FTSE All World in GBP, USD, EUR, JPY The following charts depict the local currency performance of three major FTSE benchmarks through 31st May. Of interest is that the performance experienced is inversely correlated to the performance of the local currency. Therefore, Japanese Yen domestic investors experienced the largest gains from being implicitly short their domestic currency when investing internationally. GBP USD EUR JPY FTSE REITS in GBP, USD, EUR, JPY Source: FTSE Group, Data as at 31st May GBP USD EUR JPY Source: FTSE Group, Data as at 31st May 13

8 Q2 Currency Markets Review Q2 Spot Currency Correlations AUD CAD CHF CNH CZK DKK EUR FTSE All World Total Return FTSE REITS Total Return G20 GBP GOLD HKD HUF ILS JPY MXN NOK NZD PLN RON RUB SEK SGD Silver THB TRY ZAR Currencies are not an asset class; rather they are an attribute of all assets. In reality, currencies are sovereign notes with a duration of zero, but they serve a primary function as the denomination for all assets. In this function, the currency attribute plays a vital role in the computation of an asset s performance for international investors. For example, as an international investor the performance earned on a Japanese equity portfolio includes not only the return of the Japanese equities, but also the performance of the long position held in Japanese Yen vs the implied short position in the currency of the investor s domicile. Correlation between returns can be used to identify opportunities for long-short trades and asset class denomination changes. In short, high levels of correlation between individual currencies present carry trade opportunities (for example, in this table, the Polish Zloty has a 79% correlation to the Danish Krona; a long Zloty, short DKK trade earns the embedded overnight interest rate differential while minimizing the basis risk). Similarly, some investors may look to opportunities to diversify currency exposure by blending currency trades with asset classes, adjusting the currency composition to combine attractive, low correlated currencies with equities, bonds or commodities with the aim of enhancing the risk return profile through denomination changes. AUD CAD CHF CNH CZK DKK EUR FTSE All World Total Return FTSE REITS Total Return G GBP GOLD HKD HUF ILS JPY MXN NOK NZD PLN RON RUB SEK SGD Silver THB TRY ZAR Source: FTSE Group, Data as at 31st May 15

9 Q2 Currency Markets Review Security Level Hedging and the Impact to Performance Hedged vs. Unhedged Total Return UBS ADR (CHF) For domestic investors who own assets denominated in their local currency, the performance of that currency relative to the rest of the world plays no role in portfolio performance computations. The currency attribute does, however, influence domestic asset valuations in the eyes of foreign investors. For an investor who buys an international asset, the return experienced is the product of the asset s performance and the relative performance of the currency in which the asset is denominated when compared to the investor s domestic currency. Simply stated, if the foreign asset appreciates 20% and the foreign currency depreciates 20% relative to the investor s local currency, the domestic investor earns nothing. BHP Billiton ADR (AUD) Total S.A. ADR (EUR) UBS ADR with FX Hedge (Long USD, Short CHF) UBS ADR Individual securities on this page are American Depositary Receipts ( ADR ). Although they trade on US exchanges, investors who purchase the security are exposed to the ADRs domiciled currency movement relative to the US Dollar. To illustrate the impact, the following charts show the performance of the ADR vs the performance of the ADR with the application of a daily delta hedge of the foreign currency risk. While the performance is primarily driven by the beta exposure, the impact of the currency movement is noticeable and increases the experienced volatility of the investment. BHP ADR with FX Hedge (Long USD, Short AUD) Vodafone ADR (GBP) BHP ADR TOT ADR with FX Hedge (Long USD, Short EUR) Toyota Motor Corp ADR (JPY) TOT ADR VOD ADR with FX Hedge (Long USD, Short GBP) VOD ADR TM ADR with FX Hedge (Long USD, Short JPY) TM ADR 16 Source: FTSE Group, Data as at 31st May Source: FTSE Group, Data as at 31st May 17

10 Q2 Currency Markets Review Introducing the FTSE Cürex G20 Currency Basket: G20USD NOK CAD GBP SEK RUB PLN EUR CHF RON TRY CNH JPY MXN ILS THB HKD To simplify multi-dimensional currency pricing for the investment community, Cürex Group partnered with leading index provider FTSE to create the FTSE Cürex G20 Index, a basket that can be used as a beta for currency. The FTSE Cürex G20 Index is an equally weighted basket of 20 spot currencies, with allocations approximately ½ to developed markets and ½ to emerging markets. These currencies represent the most liquid deliverable currencies in the world. As such, this basket provides a more robust US Dollar index and could be considered a reasonable proxy for a beta benchmark for the currency market as well as a performance measurement benchmark for active currency overlay managers. USDG20 Currencies ZAR SGD AUD NZD 18 19

11 Q2 Currency Markets Review Q2 G20 Currency Performance USD RETURN G DKK NOK SEK PLN CZK CAD GBP HUF RUB A currency s price is presented as a rate of exchange between two currencies, meaning currencies are priced in pairs. At any given time all currencies are also being priced against a myriad of other currencies. A Euro is priced in terms of US Dollars but it is simultaneously quoted in Yen. The influence of one currency valuation on another can affect the prices of a third currency in which it is also being quoted. The added dimension of simultaneously quoted, multi-lateral pricing obfuscates the true performance of a currency as its fundamental value begins to change. To address these complexities, FTSE and Cürex Group created a currency beta basket index series to normalize performance of all currencies versus a passive selection of the world s most liquid deliverable currencies. USD MXN CHF EUR TRY ZAR ILS RON THB CNH SGD HKD AUD JPY The table on this page shows the comparative performance of the 20 most liquid currencies in the world vs. the performance of the FTSE Cürex G20 Basket. Also shown is the performance of each currency vs. the US Dollar for comparison purposes NZD Source: FTSE Group, Data as at 31st May 21

12 Q2 Currency Markets Review Top 5 and Bottom 5 Currencies vs. G20 Top 5 Currencies vs. G At its core, G20 offers the market a standardized base currency for normalizing the relative performance of all currencies. The formalization of a more conventional, one-dimensional currency pricing methodology using a standardized base currency, gives investors a new valuation tool for comparative market analysis at any moment in time. The following charts show the performance of the top 5 and bottom 5 currencies relative to the G20 Beta Basket for the twelve month period ending in 31st May With the establishment of a beta base currency basket, we can now begin to understand the relative performance of currencies against the total basket of global currencies and more importantly, any domestic investor can understand how their own domestic currency is performing relative to the rest of the world. An additional benefit of the G20USD basket is that it provides a more robust, global view of the US dollar with respect to all deliverable currencies GBPUSD NZDUSD Bottom 5 Currencies vs. G20 PLNUSD ILSUSD CHFUSD 0.75 TRYUSD RUBUSD ZARUSD CADUSD THBUSD 22 Source: FTSE Group, Data as at 31st May 23

13 Q2 Currency Markets Review Currency Basket Performance Currency Basket Yields Q2 Twelve Month Basket Performance Annualized Basket Yields G08USD G07USD E08USD G20USD E08USD TR G07USD TR G08USD TR G20USD TR Designed as benchmarks for the performance of currency strategies, the FTSE Cürex FX Benchmark Basket Index Series measures the value of equally weighted baskets of reference currencies against a single base currency. The indices are rebalanced weekly under a transparent rule set. FTSE Cürex FX Benchmark USDG07 A benchmark index measuring the value of the US Dollar against seven developed market currencies (AUD, CAD, CHF, EUR, GBP, JPY, NZD). FTSE Cürex FX Benchmark USDG08 A benchmark index measuring the value of the US Dollar against eight developed market currencies including the Chinese Renminbi (AUD, CAD, CHF, CNH, EUR, GBP, JPY, NZD). FTSE Cürex FX Benchmark USDG20 A benchmark index measuring the value of the US Dollar against twenty global currencies (AUD, CAD, CHF, CNH, EUR, GBP, HKD, ILS, JPY, MXN, NOK, NZD, PLN, RON, RUB, SEK, SGD, THB, TRY, ZAR). FTSE Cürex FX Benchmark USDE08 A benchmark index measuring the value of the US Dollar against eight global emerging market currencies (CZK, HUF, MXN, PLN, RUB, THB, TRY, ZAR). By combining multiple currencies into a single basket, currency composition can be strategically allocated to achieve benefits from diversification. Given the current tenor of central bank policy, one potential risk investors may look to avoid is the risk of monetary policy designed to stimulate asset price appreciation through currency devaluation. Through diversified baskets, investors are able to create a Global Currency as a form of asset denomination. As is shown in the chart Currency Basket Yields there may be an additional benefit to undertaking this kind of approach. Some investors may choose to use baskets to port yield in order to achieve better income objectives in markets with low short-term interest rates. This will have the effect of redenominating the currency component of any index to a diversified basket like to FTSE Cürex G Source: FTSE Group, Data as at 31st May Source: FTSE Group, Data as at 31st May 25

14 Q2 Currency Markets Review Q2 Overnight Rates: DANI Rankings % annualized -0.21% DKKUSD Denmark Norway 1.36% NOKUSD Sweden 0.81% SEKUSD Poland 2.38% PLNUSD Hungary 2.61% HUFUSD Romania 1.90% RONUSD Turkey 7.59% TRYUSD FTSE Cürex DANI Overnight Rate Indices measure the value of Overnight Rates as determined by the Spot OTC FX and Tomorrow-Next swap market. The indices calculate the Overnight Carry in the form of an annualized yield. When added to the local currency risk free or overnight repo rates, the DANI Rate Indices provide a window into 23 nations overnight interest rates that are market tested on a daily basis in the world s deepest and most liquid markets. The rates on this page reflect the twelve month average annualized rates (through 31st May ) earned daily over the course of the year. Mexico 3.07% MXNUSD Canada 0.94% CADUSD United Kingdom 0.35% GBPUSD -0.14% CZKUSD Czech Republic -0.17% CHFUSD Switzerland European Union 0.07% EURUSD South Africa 5.17% ZARUSD Israel 0.74% ILSUSD Russia 5.86% RUBUSD -0.52% THBUSD Thailand China 1.11% CNHUSD Singapore 0.02% SGDUSD -0.01% HKDUSD Hong Kong -0.10% JPYUSD Japan Australia 2.53% AUDUSD New Zealand 2.62% NZDUSD 26 Source: FTSE Group, Data as at 31st May 27

15 Q2 Currency Markets Review Equity Index Return vs. Currency Strength Data suggests an inverse relationship between a country s stock market performance and the strength of the domestic currency. Currency strength can change the relative value of a country s securities market in the eyes of the world. This relationship has been very pronounced in Japan; the policy of cheapening currencies in an effort to raise asset prices and produce an indirect domestic wealth effect is a tool that all developed-market central bankers seem to use. The following chart plots the twelve month Equity Index Return through 31st May, as computed by FTSE s country index (or blend of country indices in the case of baskets) versus that country s currency strength measured by the currency performance relative to the FTSE Cürex G20 Basket through 31st May. This provides another tool for investors to assist them in evaluating two of the primary factors when investing internationally. 40% 30% 20% 10% Equity Index Return G20 G8 CHF DKK HKD JPY NZD SEK TRY E08 AUD CNH EUR HUF MXN PLN SGD USD G7 CAD CZK GBP ILS NOK RUB THB ZAR -15% -10% -5% 0% 0% 5% 10% Currency Strength vs G20-10% 28-20% Source: FTSE Group, Data as at 31st May 29

16 Q2 Currency Markets Review FTSE Cürex FIX Overview Index Codes Base AUD AUD Australia Dollar ILS Israel Shekel SEK Sweden Krone CAD CHF CAD Canada Dollar JPY Japan Yen THB Thailand Bhat CNH CZK CHF Switzerland Franc MXN Mexico Peso TRY Turkey Lira DKK EUR GBP CNH China Yuan NOK Norway Krone SGD Singapore Dollar HKD HUF EUR Euro NZD New Zealand Dollar ZAR South Africa Rand ILS JPY DKK Denmark Krone PLN Poland Zloty USD United States Dollar MXN NOK GBP Great Britain Pound RON Romania New Leu NZD PLN HKD Hong Kong Dollar RUB Russia Ruble RON RUB SEK SGD THB TRY USD ZAR Ref AUD CAD CHF CNH CZK DKK EUR GBP HKD HUF ILS JPY MXN NOK NZD PLN RON RUB SEK SGD THB TRY USD ZAR 30 31

17 FTSE is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited ( FTSE ) under licence. The FTSE Cürex FX Index Series is calculated by FTSE International Limited using proprietary methodologies developed by FTSE, Cürex Index Data Systems, LLC ( Cürex ) or their respective Affiliates. All rights in the Index Series vest in FTSE and Cürex. All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by FTSE, any partner or their licensors for any errors or for any loss from use of this publication. Neither FTSE nor any partner nor any of their licensors makes any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the name of the Index set out above or the fitness or suitability of the indices for any particular purpose to which it might be put. No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of FTSE. Distribution of FTSE index values and the use of FTSE indices to create financial products require a licence with FTSE and/or its licensors. Nothing in this presentation constitutes financial or investment advice. FTSE is not an investment adviser and makes no representation regarding the advisability of investing in any security. A decision to invest in any such security should not be made in reliance on any information above. Indices cannot be invested in directly. Inclusion of a security in an index is not a recommendation to buy, sell or hold such security. Please see ftse.com for additional legal disclosures and complete index methodology details. Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown do not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index. All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by FTSE, any partner or their licensors for any errors or for any loss from use of this publication. Neither FTSE nor any partner nor any of their licensors makes any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the name of the Index set out above or the fitness or suitability of the indices for any particular purpose to which it might be put. No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of FTSE. Distribution of FTSE index values and the use of FTSE indices to create financial products require a licence with FTSE and/or its licensors.