How do current events impact currency rates and why should you never try to predict them
Forex markets have become increasingly volatile for investors and businesses alike. In saner times, average rates fluctuated by less than 1% per day. This made it easy for import/export businesses to predict costs with a reasonable degree of certainty, whilst limiting losses of currency traders.
Alas, things have changed recently. The rise of protectionist sentiments has upended Forex markets like an apple cart, leading to larger price swings than normal.
Take the election of President Trump for instance. He campaigned on raising tariffs on cheaper labour markets; following his election, the value of the Mexican peso plummeted by more than 12% versus the American dollar in just a few short months.
More frequent ‘black swan events’ like the one mentioned above have spawned a problem common normally found on more turbulent platforms – attempts to time the market by retail investors.
Not all are traders – some are expats trying to preserve the buying power of their capital ahead of an anticipated geopolitical event. In either case, increased volatility on FX markets has substantially elevated risk for those who frequently move their money from one currency to another.
Let’s explore this subject further.
Fail Britannia: Brexit and the fall of the GBP
Meet Christina. Christina is a citizen of the United Kingdom who moved to Singapore in 2015 to take a banking job. While she has excelled in her new post, she has struggled financially since her arrival.
While she is compensated fairly by her employer in Singapore dollars (SGD), most of her life savings are in pounds sterling (GBP). In 2016, a majority of Britons voted to leave the European Union. This led to a huge sell-off of the GBP, as this decision cast a pall of uncertainty over trade.
The GBP/SGD rate has fallen nearly a quarter from its high in 2015. A single referendum vote set Christina’s financial goals back by years; with the full impact of Brexit still to be determined, she is now musing about moving her savings to SGD.
BTC: e-currency of the future, or fad?
Meet Matt. Matt quit his job to trade Forex five years ago. A former network administrator, he learned about bitcoin (BTC) well before it drew the attention of speculators. He got in at $600, and rode out early drops to the low $100s.
He even withstood the temptation to sell as it rocketed to nearly $20,000. Lately, though, increasing talk of regulation and governments barring access to BTC have tanked the market by almost 70%.
With the price now hovering around the $6,500 mark, should Matt cash out while his BTC are still worth something, or should he hold on? After all, numerous commentators still maintain blockchain is the future, and thus, BTC is ‘headed for the moon’.
In both cases, Melissa and Matt are attempting to time the market. Are they justified in doing so? The answer to this question is a resounding NO.
The future is insanely difficult to predict
Even institutional investors have ended up with egg on their face by attempting to time the market. If they can fail spectacularly at this endeavour, retail investors don’t have a prayer.
A study published by the Center for Retirement Research in 2017 hammers this point home. They looked at Vanguard fund managers who opted to depart from the ‘glide path’ approach to investing to seize on short-term profit opportunities.
Not even experts could consistently make money timing the market. The study showed that these investment managers underperformed their ‘buy and hold’ colleagues by 0.14% per year.
That doesn’t sound like a lot, but it is still a loss. If fund managers who live, eat, and breathe financial data can’t time the market, there is no hope for the average retail investor. According to DALBAR’s 2016 Quantitative Analysis of Investor Behavior Study, the average mutual fund investor lost money in 2015; meanwhile, the S&P 500 rose 1.38%. Annualised returns from 1996-2015 revealed a yawning gap between market timers and the performance of the S&P. The former only saw a return of 4.67%, whilst the latter finished ahead 8.19% over a 20-year period.
Still worried about seismic shifts in the FX market?
Markets haven’t been this turbulent in some time, so we get why many are apprehensive. We maintain that the best investing approach is to identify great value opportunities and to buy & hold them over the long term. However, we realise this will not satisfy those convinced a hard Brexit will tank their retirement portfolio. In this case, it’s best for them to rely on the experts in this field, as listening to their advice will limit the damage of trying to time the market.
When they feel that major change is imminent, they will phone their client advising them to buy or sell. By checking out MoneyTransferComparison’s global list of money transfer companies, nervous investors can find the service that is right for them.
Harnessing the power of technology, together with commercial interest of such currency providers to provide notably solid service and retain their clients, enables the quality of guidance provided by such companies to be excellent. Hence, the clients who choose to use them should not be attempting to stay on top of the political and economical situation and make its own forecasts.
