Forecasting short-term and medium-term currency developments is extremely tricky. Despite this, investors need to have an overall framework for managing their currency allocation. Here is mine:

• The desire of many industrialised countries to debase their currency implicitly (via inflation) or explicitly (via depreciation or monetary reform) is a very worrying trend. It is a hidden form of protectionism that will result in more losers than winners;

• The two main currencies, the dollar and the euro, are both experiencing severe problems. In the case of the dollar, there is a greater risk of resorting to the printing press. The euro, on the other hand, is affected by the problems of its peripheral countries and the widening gap between Northern and Southern Europe;

• The dollar, until there is evidence to the contrary, is still a safe haven when investors become more risk averse. In the past three years, the dollar gained against the euro when the stock markets were falling and lost ground when the markets were rising;

• On the currency markets, the euro is ‘anti-dollar’. As long as China continues to show resistance to a more significant appreciation of its currency, the euro will be the default alternative for those wishing to exit from the dollar. The result is that when the dollar depreciates, it pulls down the Asian currencies with it, as well as other currencies such as sterling;

• The currencies of the industrialised countries which have sounder fundamentals and which seem less inclined to resort to printing money (Australia, Canada, Norway) have got rather expensive. At the other extreme, an ‘unloved' currency such as sterling currently seems cheap;

• Developing countries fundamentals are generally in much better shape than those of the industrialised countries;

• It is difficult to calculate the ‘intrinsic value’ of currencies. However, based on theories such as purchasing power parity, it would seem that the euro is around 10% overvalued against the dollar, which is in turn overvalued against the Asian currencies. In the long term, the dollar tends to correct its overvaluation or undervaluation against the European currencies. Its current undervaluation is not exceptional however. In the past 10 years, the dollar has been up to 25% undervalued (2008) and up to 20% overvalued (end 2000);

• Valuations and fundamentals are therefore calling for a long-term appreciation of the Asian currencies, especially since such appreciation would help to rebalance the world economy. It would also provide the Asian authorities with some ammunition in their battle against inflation, which is starting to appear in the region;

• The Asian authorities will nevertheless continue to oppose too rapid appreciations in their currencies as can be seen in the controls implemented by some of these countries (Taiwan, Thailand, South Korea, etc). Within the Asian region, it is important to differentiate: for example, the Thai baht is relatively expensive, while Hong Kong dollars, Taiwan dollars, and the Korean won are quite cheap.

Here is how these ideas are implemented in BL-Global Flexible:

The currency allocation of the fund is as follows:

• EUR: 34%
• USD: 29%
• Asian currencies ex Japan: 12%
• Currencies of other industrialised countries (CAD, NOK, JPY, CHF): 12%
• GBP: 9%
• Other: 4%

The dollar’s net exposure is reduced to 15% through forward sales against the euro and the Singapore dollar;

Sterling’s net exposure is reduced to 5% through forward sales against the euro.

The currency allocation of the fund after hedging is as follows:

• EUR: 45%
• Asian currencies ex Japan: 19% (including 11% SGD)
• USD: 15%
• Currencies of industrialised countries: 12%
• GBP: 5%
• Other: 4%