8/14/2019 Pierre Lequeux Transcript II

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BalancingDangerandSuccessinForexTrading

InterviewbyJonathanEllenor,FinanceIQ

PierreLequeux,HeadofCurrencyManagementatAvivaInvestors,London,joinsFinanceIQtodiscussForexTrading.

FinanceIQ:WhatdoyoufeelthatthelatestbailoutofPortugalmeansforthelongtermfutureoftheEuroand

whateffectdoyouthinkthiswillhaveonthepound?

PLequeux:Ithink,thatthisbailoutwasexpectedandthattheforeignexchangemarketreactprincipallyto

unexpectednews.ThereactionoftheEurohasbeenquitetellingsincetheannouncementswe'veseenafairly

strongappreciationoftheEuroversustheUS$.Ithink thatsincesomeuncertaintyhasbeentakenawayitwill

probablybringabetterconfidenceintotheEurozoneeconomy.IntermsoftheUKparticipatingtothefundingI

thinkitwillhaveverylittleeffectonthepound.Clearlythefundingthatweare talkingaboutisrelativelysmallso

Ican't

see

that

having

an

immediate

effect

on

the

pound.

In

regard

of

the

possible

domino

effect

within

the

euro

zoneeconomies,Ithinkthatisveryunlikely.PeoplehaverecentlyfocusedonSpainbutitsfairtosaythatSpainis

muchmorediversifiedandstrongereconomythanPortugalorIreland.SoIthinkitisquiteunlikelyforSpainto

fail.Wehaveeseenthatrecentlyauctionswentwellandyieldcamelower,Ithinkthatsquitetelling.

AboutthepossibleriskoftheEurobreakingup,thoseareheadlineswerenotwrittenbyverywellinformed

peopleandarefantasistcomments.ThebreakupoftheEurowouldbesomuchdamagingforEurope.Especially

youwouldseesuccessfulcountrysuchasGermanyforwhichtheEurohasbeentremendousinregardoftrade

competitivenessfacingtheriskofgoingbacktoastronglyappreciatingDeutschmark.TheDeutschmarkwould

becomeverystrongasmarkettendstorewardtradesurplusandeconomicsuccess.UltimatelyIthinkitwouldbe

verybadnewsforGermanyasastronglyappreciatingcurrencywouldmeanforthembeinglesscompetitiveand

clearlyhaving

arising

unemployment.

Probably

not

something

to

look

for.

LetsimagineGreeceorPortugalorIrelandactuallycomingawayfromtheEurocertainlythiswouldhavevery

negativegrowthimplicationatfirstandsomehugelyinflationaryramificationduetothefactthattheywouldhave

acurrencywhichwouldbehugelydevalued.Notsomethingwhichisaverygoodprospectforthemeither,Iwould

say.SoIthinktheEuroisworkingasaconceptandthatthevariousgovernmentsrecognisethat.Though thereis

someprogresstobemadeIthinkifyoulookattherecent growthintheEurozone,wecansayitsworkingbetter

thantheUSrecently.

FinanceIQ:Wouldyousaythatwerepasttheworstandthingsarelikelytostartimproving?

PLequeux:

Ithink

so.

Im

fairly

optimistic

about

growth

in

Europe,

definitely.

Ithink

obviously

Europe

grows

nowadaysinaworldwheretheeconomyarefarmuchmoreintegrated.Itisquiteclearthatwehavebecome

dependentonwhat'stakingplaceinotherpartsoftheworld.BythatImeanmainlyemergingmarkets,countries

whoarenowaprimedriverofthedemandforgoodswhicharemanufacturedinEurope.Wesomehowbecame

hugelydependentonthegoodfortuneofChinaanditsowndomesticgrowth.YoucanseethewayChinahas

impactedtheexportofcarsinEurope;IthinkBMWturnover,whichwasreleasedinJanuary,impressedmany.It

wasalsoapparentthatagreatpartwasduetothebusinesscomingfromChina,andthesamehappenedwith

othercarmanufacturers.

Personallydespiteongoingdebateaboutit,Ican'tseeChinasuddenlygoingintorecession.Ithinkthey'redoinga

verygoodjobinstrengtheningtheirfinancialsector,increasingreserverequirementforbanks.Themarketis

slowlybut

surely

coming

to

term

with

that.

Now

when

they

hike

the

reserve

requirement

there

is

very

little

move

intheequitymarketonthebackofit.Ifyoudlookattheeffectofitayearago,youwouldhaveseensome

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ofthecapitalflowduetothereconstructioneffort willcomefromtheprivatesectorbecausealotofthatwas

insured,anyway.Sothatsreallyinsuranceclaimsflowsandcapitalflowsbettingonthereconstructioneffortthat

youwillhavetofollowtounderstandhowtheYenwillbehaveinthemonthstocome.Whatyouwillseeinthe

forthcomingmonthsisprobablysomeflowofmoneycomingbacktoJapanbecauseasaninvestmentthat's

probablyagoodpropositionassumingtheycontaintheFukushimaplant.

Naturaldisasterscreatejobsanddemandforgoods,soyouwillgetdemandforcars,youwillgetdemandforthe

serviceofutilitycompaniesontherise,soshouldattractsomedegreeofinvestmentfromforeigninvestors.The

strengthintheYenwillalsobearesultofthecapitalflowsduetoclaims,i.e.alotofthedamagethathasbeen

donewasinsuredandclearlyoncethoseclaimsaremadeandprocessedthencashwillbetransferredtoJapan.

Clearlytheyenappreciatedalotandveryquickly,aftertheearthquakehappened.HoweverIdon'tthinkthiswas

aboutanyspeculationofrepatriation,butitwasmoreduetothefactthatifyouhavesomederivativecontracts

ontheNikkeiandtheNikkeigoesdownby10%,itislikelythatyouwouldhavehadtoprovidemoremarginin

Japaneseyentoyourbroker.Ithinkthatiswhytheyenappreciatedatthetimeasitcreatedanimmediate

requirementtodeliverasignificantamountofJapaneseyentovariousmarginaccountastheassetmarketswent

dwindling.Since

then

weve

seen

some

degree

of

intervention

by

Central

Banks.

And

dollar/yen

is

trading

at

about

85atthistime.Ihoweverremainconvincedthatwewillrevisitalowerlevelintheforthcomingmonthsdueto

thoserepatriationflows.

FinanceIQ:Oneofthethingswediscussedthismorningisrecenthistoricalparallelstoalotofthesethings.

Clearly,thesearemajorglobaleventsbut,asyou'vesaidthere,weveseentheKobeearthquake,weveseen

againtheHomelandInvestmentAct1;wevebeenthroughsomeofthesecyclesbefore.Doyouthinkthatthere

areanyhistoricalparallelsthatcanbedrawnastraderstrytofindthewinningstrategiesintodaysmarket?

PLequeux:IthinkwealwayshavealottolearnfromhistorybutIalsothinkthatwhateverparallelsyoumakewith

historyyouhavetosomehowtranslatethemincontextwiththecurrenttechnologicalenvironmentintermsof

market

dynamic

and

effect.

By

that

I

mean

that

the

information

is

travelling

a

lot

faster,

that

your

ability

of

transactinginthemarketisalsoactuallyalotfasterthanwhatitwassaytenyearsago.Thereforemarket

responsestoinformationtendtobemorepronounced.Atypicalexample,imagineyourselfduringtheperiod

whenwehadtheKobeearthquake.

Ifyouhadwanted,asaprivateperson,tobuysomeJapanesestocksorNikkei,youwouldhavehadtogotoyour

bankorbrokerandthatwouldnthavebeennecessarilyaveryquickprocess.Todayyoujustgoontheinternet

andbuyanETForsomefuturecontractonyouronlineaccount.Youlogin,youtrade,youlogoutitsquickand

efficient.Ithinkthetechnologicalcontextexplainspartly whytheNikkeididreboundquitequicklythereafter.It

wasnotonlyaboutintervention;itwasaboutinvestorstakingaviewthatitsagoodthingtoinvestonthe

Japanesestockmarketaheadofthereconstructionandtheycouldactontheirviewquickly.

FinanceIQ:WeveseenfairlyrapidadvancesintheamountofFXthat'sbeentradedandagainthatsalloverthe

headlines.WouldyouexpecttoseethegrowthinFXtocontinue,particularly?

PLequeux:FXvolumeshouldcontinuetogrowIthinkthereisnodoubtthat.Largepensionfundsandinvestors

willcarryoninvestingininternationalassets,Idon'tbelieveinacomingbackof thehomebias.Itmeansthat

clearlyaspartofyourinternationalportfolioyouwillenduphavinggreaterexposure,notonlytoforeignassets,

butalsocurrencyexposures.SoifyoubuyJapanesestockandareaUKinvestoryouwillhavesomewhereonyour

portfoliosomeYenexposurerelativetothepound.Becausecurrenciesarealotmorevolatilethantheyusedtobe

youwillhavetodealwiththisandeithertopassivelyhedgetheriskortogetacurrencymanagertodothis

dynamicallyforyou.

Currencyriskisgreatersoitcanbringvaluebutitcantakevalueaswelloffyourportfolio.Asanexampleifyou

investinJapaneseequityandtheyen depreciateby10%,thenyou'redown10%onthatinvestmenttotalreturn,

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