Prepare for currency swings

The depressed global economy is weighing on currencies.

So says Andrew Kronschnabel, portfolio manager at Logan Circle Partners in Philadelphia. He manages the Renaissance U.S. Dollar Corporate Bond Fund.

Take the Canadian dollar, he adds, which has been fluctuating due to factors such as flat global growth and faltering commodities. It’s currently sitting at about US$0.90.

Read: Who wins from the weak loonie?

Problem is, markets aren’t expected to improve any time soon. While the U.S. and U.K. are expected to grow this year, says Kronschnabel, many countries in Europe and Asia are stagnant or continuing to slow.

Emerging trends

Emerging market currencies are most volatile right now, says Kronschnabel.

He points out officials in Turkey called an emergency meeting in January to discuss how to defend the plummeting lira. They ended up hiking the country’s three main policy rates by “several hundred basis points to defend the [lira’s] decline,” as well as to stop outflows of foreign investments.

Read: Emerging markets subdued

But following the aggressive move, the lira’s value swung dramatically—on January 29, it spiked at US$0.46200, and then dropped the following day to $0.43564. It’s currently sitting at about $0.45.

Read: Don’t run away from emerging markets

Yet, other struggling countries may follow suit. Not only are international interest rates becoming more competitive, says Kronschnabel, but there’s also less incentive to seek high returns in emerging market markets.

This is a problem, he explains, since aggressive monetary policy changes can cause “fundamental economic slowdowns,” such as the one occurring in China due to the government’s desire to support the yuan.

So, advisors should monitor currency stability throughout the year.

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