Getting the Currency Right Is Proving to Be the Key to Making Money in Stocks

Getting currency trends right has been the difference this year between slim to large-scale returns when it comes to stocks and that isn’t likely to change soon.

Just look at Japan’s Nikkei 225 Stock Average. In dollar-terms, or once yen proceeds are converted to the greenback, the index is up 16.7 percent. For those staying in yen, the gain is 13.5 percent. When it comes to the euro, the return is 4.5 percent, given that Europe’s shared currency has appreciated 8.6 percent versus the yen.

Apart from factors such as corporate earnings, “what did matter the most -- which was the big, big call of 2017 -- was getting FX right,” Max Kettner, cross-asset strategist at Commerzbank AG, said Monday on Bloomberg Radio. “If you got FX wrong and you sort of made the right regional calls, the right sector calls, or the right calls in the rate space -- it didn’t really help you an awful lot. I really won’t expect that to change.”

Improving growth in the euro-area and expectations the European Central Bank will begin as soon as this week to reduce the amount of bonds it purchases each month has stoked gains in the euro. The common currency has strengthened versus all of its Group-of-10 peers this year, appreciating the most versus the dollar at about 12 percent.

Risks still remain with currencies, partly given stretched trader positioning, so “if fundamentals change one way or another there is quite a bit of potential to go either way in terms of magnitude quite drastically, and that will then also have an effect on the equity performance again,” said Kettner.

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