EUROZONE - Pension funds within the eurozone breathed a sigh of relief in July as the US dollar ceased to fall, slipping into the summer trend of sideways trading.
European pension funds, which typically have a high allocation to US dollar denominated securities in their international portfolios, have been hit hard by the US dollar’s 22.5% depreciation against the euro since January last year.
As a result more pension funds are looking at currency overlay programmes to capture gains or reduce the volatility of returns with a hedge.
“Unfortunately many pension funds have already missed a lot of the moves and have therefore taken a lot of the pain on the bulk of it. It’s a case of bolting the stable door after the horse has gone.
“But I don’t think they want to leave the risk on the table and that they would rather put the hedge in place, even if there’s a chance of a small retracement, just so that they’re protected against the volatility one way or the other,” said Paul Duncombe, head of currency management at SSgA.
As to where the euro will head after the summer breather, Duncombe commented: “I think it will take its lead from two things. There’s been a one off shift in foreign reserves from dollars into euros which has provided some steady buying. The bulk if not all of that readjustment has now taken place, and so the likelihood of another large upwards move in the euro is fairly low.
“However the US is still running a large current account deficit and if the bond market continues to look unattractive and continues to fall then one wonders how attractive the bond market will be to foreign buyers. So there is the danger that the US bond market will continue to fall if foreigners don’t finance the deficit.”
This week's edition of Professional Pensions is out now.
Ben Gunnee reflects on 2018 and talks about the Fiduciary Management trends to keep an eye on in 2019
Lloyds Banking Group secured 630,000 new pension customers last year, according to its 2018 annual results.
Guy Opperman has rejected calls to speed up changes to auto-enrolment (AE) despite increasing pressure to boost contribution rates and overall savings pots.