Keeping Your Foreign Exchange Investment in Good Shape

Not only is Mr. Kang-Chuen Shek (Shek Sir), Associate Publisher and Head of Research at Hong Kong Economic Times, an expert in foreign exchange investment, he is also a health enthusiast. In fact, the two seemingly different fields have a lot in common, so mastering their underlying principles can help you stay physically and financially fit.

Shek Sir shared his views on how to maintain good health: "As the Chinese saying goes 'everything has its own way of developing', and the same is true for staying healthy as our bodies are built differently." Shek Sir explains that every individual has a unique body constitution: some are strong, some are weak, some tend to be hot, and some tend to be cold. Therefore, in order to apply the proper remedy, one must learn his/her body constitution before undergoing food therapy or taking medication. For example, if your body is weak, you should switch to a therapeutic diet to revitalise it.

Distinguish the 'Yin and Yang' of Foreign Exchange Investment

Shek Sir goes on to compare his health principles to foreign exchange investing: "The uptrend in foreign currencies can be distinguished into 'yin' (weak) and 'yang' (strong). If the nature of the ascent is 'yang', or the reason of appreciation can be justified, then you may consider to hold on to the foreign currency for the long haul. However, if the uptrend is 'yin', you may consider to exit the position when the exchange rate reaches the target level unless favourable factors emerge to 'nourish' the foreign currency." When we are concerned about our own health, we can consult medical practitioners, but what can we do if we have doubts about the 'yin and yang' of foreign currencies?

Shek Sir points out that, to gauge foreign exchange movement, the crux is to learn more about monetary policies, in particular interest rate policies. Continuous inflation and robust economic growth generally fuel market expectations that central bankers may raise interest rates soon. As a result, the related currency will attract capital inflow, driving its exchange rate upward. Conversely, if an economy suffers from deflation and weak prospects, there will be little hope of a rate hike and the economy's exchange rate may fall. Shek Sir illustrates this with an example: "After Lehman's collapse in 2008, the US economy was dragged into choppy waters, which was a clear 'yin' sign for the US. Besides, the US Federal Reserve had just started its quantitative easing (QE) programme back then. Therefore, the fall in USD at that time was justified. Any momentary rebounds were just investors closing out their positions, they were merely illusions."

The Panorama of Foreign Exchange Investing

Traditional Chinese medicine abides by the doctrine that 'things are interconnected', meaning that all organs of the body can affect each other. The same philosophy applies to the foreign exchange market as well. As the exchange rate represents the price ratio for us to convert a currency into another currency, Shek Sir notes that investors must not focus solely on a single country when they evaluate foreign exchange investment. He stresses that the exchange rate represents the relative states of two countries: "The Bank of Japan has rolled out a negative interest rate regime and is conducting a QE programme. Theoretically, the Japanese Yen should have depreciated. But why did the Yen advance in the first half of the year? This is primarily due to a number of uncertain factors in the external environment, such as cooling US rate hike expectations, the 'circuit-breaker' mechanism in the Chinese stock market at the beginning of the year, the escalating risk of China's economic slowdown, and the uncertainties in Britain and the Euro Zone in the shadow of 'Brexit'. Consequently, the Yen's performance was not as weak as the market had imagined in comparison to the USD, RMB, the British Pound and the Euro. Since other currencies were edging lower and lower, the Yen has in fact appreciated."

 Lastly, Shek Sir advises us to monitor the trends in US interest rates, which may hint at the future direction of foreign currencies for the rest of the year. Also, he adds that, while the impact of the US unemployment rate has become less significant, investors should pay close attention to US inflation data. Furthermore, Shek Sir remarks that in the G20 summit, heads of governments from around the world made it clear that when global economic growth is still below expectation, any competitive devaluations are to be avoided. Thus, investors should keep an eye on central bankers to see if they will scale back their QE programmes concurrently.

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