Why investors may want to consider currencies

The currency markets may offer opportunities that are not available in other asset classes.

Dec 17, 2012 | Related Links Index Hidden Parent

The currency market never sleeps, trading 24 hours a day.  Highly efficient and increasingly transparent, it offers investors the opportunity to benefit not only from an additional source of return but also from another means of diversifying their portfolios that may potentially reduce risk.

“Each day, an average of $4 trillion currencies is traded,”* says Sara Yates, Global Currency Strategist at J.P. Morgan Private Bank, who oversees our currency forecasts, as well as our client investment and diversification strategies in foreign exchange.
 
“The size and scale of this market means that—for the major currencies in particular—liquidity is deep, the bid-offer spread is narrow, and currency investments can easily be customized to suit individual needs,” notes Ms. Yates.
 
Two possible sources of return
Currency investments offer two potential sources of income. The first comes from the “carry,” which is the difference between the interest rates of the two currencies transacted. The second arises from moves in exchange rates. These moves are driven by a range of factors, such as changes in relative interest rates, economic variables and geo-political events. 
 
The importance of these factors can change on a day-to-day basis. “In this fluid environment,” Ms. Yates says, “we combine quantitative and qualitative analysis with our technical expertise to help us identify appropriate strategies for our clients.”
 
Currency and volatility
While many people believe that currencies are a more risky alternative to investing in equities and bonds, when bought without leverage, currencies may be the least volatile of the three. Ms. Yates also underlines the potential versatility of the asset class, commenting, “through the use of structuring, we are also able to offer investors the possibility to access currency market opportunities while protecting their initial investment.”
 
In addition, as currency returns have typically had a low correlation with the performance of other asset classes, adding a currency component to a portfolio may provide diversification benefits.
 
We invite you to contact us, and a J.P. Morgan representative will be in touch with you.

 

Chart footnotes

Top chart:
Source: Currencies—J.P. Morgan g7 Volatility Index, which tracks the level of volatility in G7 economies based on three-month at-the money forward options; equities—CBOE Volatility Index, a measure of the implied volatility of S&P 500 Index options; fixed income - USD Swaption 5-Year Fixed/Floating Volatility Index, which measures options on interest rate swaps with a 5 year tenor.

Bottom chart:
Source: Currencies—Deutsche Bank Currency Returns Index, which measures the systematic returns of the world’s currency markets; equities—S&P 500 Index, a capitalization-weighted index of 500 stocks from a broad range of industries; fixed income—JPM Global Aggregate Bond Index Total Return Unhedged, which represents Developed Market Treasuries, Emerging Market Local Treasuries, Emerging Markets External Debt, Emerging Markets Credit, U.S. Credit, Euro Credit, U.S. Agencies, U.S. MBS, Pfandbriefe; oil—WTI. Past performance is not a guarantee of future results.

Disclaimers:
To the extent that this message was prepared by personnel in the Sales and Trading Departments of one or more affiliates of JPMorgan Chase & Co., and is not the product of J.P. Morgan’s Research Department, it is not a research report and is not intended as such. This material is for the general information of our clients and is a “solicitation” only as that term is used within CFTC Rule 1.71 and 23.605 promulgated under the U.S. Commodity Exchange Act.

 
 
 

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