Consider the recent experience of the Canadian dollar (CAD). From 2002-2012, the “loonie” (Canada’s colloquial name for its currency) soared by approximately 55 percent versus the U.S. dollar. At the end of that run, CAD bears were nearing extinction. Even the cover of Maclean’s magazine confidently announced that Canada was unstoppable. In hindsight, that was a clear contrarian opportunity, and the CAD promptly entered a steady downward path.
While most investors understand the role that stocks, bonds and even commodities play in a portfolio, currencies remain opaque. So thick is the fog that few investors are willing to confess any visibility at all. Yet that presents significant opportunities for intrepid investors.
Putting it all together, investors should generally hedge currencies with high valuations and exuberant sentiment, and unhedge currencies with low valuations and demoralized psychology.
Policy is crucial too. It has been key to own currency-hedged equities in economies that are successfully devaluing their currency, like Japan and the eurozone; or bonds in economies allowing currency appreciation, like India and the U.S.
With experimental monetary policy now widely accepted as standard operating procedure in today’s post-crisis era, the opportunities to add value through active currency management are enormous. Conversely, standing still carries significant risk.
Tyler Mordy, president and chief investment officer of Forstrong Global, is a recognized innovator in the design and application of global macro ETF managed portfolios. He is widely interviewed by the financial media for his global investment strategy views, as well as ETF trends. CNBC has called him one of the “best independent ETF experts.”