In the video I have chosen for this assignment, Rebecca H. Patterson gives the speech on the topic of global currency markets. The three central issues she covers are reserve currencies, particularly the dollar, the driving forces of currency markets, and, finally, the way investors should use currency markets and manage various currency regimes.
Presently, the United States has the largest economy in the world, and the US dollar is the most traded currency worldwide. As the proof, approximately 44% of all transactions are made in dollars, and central banks have almost two-thirds of their reserves in this currency. Even though China’s economy is probably growing faster than that of the US, investors hardly choose China instead of the United States to preserve their money in the local bond market (at least, today).
Nevertheless, the situation in currency markets is not stable, and a lot may change in the following year. What currencies, if any, can compete with the dollar for taking the place of the reserve currency? Evidently, the euro goes first on the list of competitors. However, it can hardly compete with USD since the Euro Area has no deep stable bond market to play in. And it is highly unlikely that Europe will harmonize its market soon. The second place on the list is taken by CNY. Even though China is moving towards the deep and stable bond market, it will not come there during the following year. Perhaps, someday, CNY will become the reserve currency, but that will not happen in the next five or even ten years. Then, SRD is believed to be the dollar’s competitor. Still, it is not: SRDs can not be traded actually, and they are not used in the public domain. Finally, there is Bitcoin, which attracts a lot of public and media attention. Admittedly, it is quite useful for transactions, but there is nothing more: it is not regulated, not stable, and very speculative. As the reserve currency, it is not suitable since people want to put their money in something very safe.
The next important issues Rebecca Patterson talks about in her speech are the driving factors of currency markets. The first thing that is influential is currency valuation, a circle of overvaluation and undervaluation of the particular currency. The second thing that makes a difference is the balance of payments. If the global trade flows dominated in the 1980s or the 1990s, now that role passed to global capital flows. This change can be explained partly by the globalization, partly by more information available to investors, and partly by the reduction of regulations and the fact that it is easier now to put money in and out different countries around the world. So, people are more comfortable with having their money overseas, and global capital flows drive currency markets more than trade flows presently.
The last thing Rebecca discusses is what investors should do. First of all, she strongly recommends avoiding currency ETFs since that is how a person pays multiples of what he or she pays in currency markets. Then, she states that fixed income is not so good idea either because the currency does not drive the bond as much as the bond drives the currency, so the dollar has not much effect on bond yields. Instead, the focus should mainly be set on the US equities since the US growth benefits equities. Finally, the situation with non-US equities and commodities is much less predictable.
At that end of the video, Rebecca Patterson provides some predictions based on the speech she has given. Most importantly, she assumes that the dollar will continue to strengthen during the next year, driven by growing capital flows and the power of the US economy vis-à-vis other markets overseas.