What it means
Exchange rates are driven by many forces, including interest rates, inflation, economic growth, trade flows, government policy and investor sentiment. A currency strategist studies these forces and builds a view on where a currency is likely to go over the coming weeks, months or years.
The output is usually a written forecast and a set of trade ideas, often with a stated time horizon and a level at which the view would be proved wrong. Strategists work in several settings.
At a bank, they write research for clients and support the trading desk. At an asset manager or hedge fund, they advise portfolio managers on currency positions, and in a large company, a strategist may advise the treasury on hedging.
A good strategist explains the reasoning as well as the number. A forecast that the euro will reach 1.15 against the dollar is more useful when it is accompanied by the assumptions behind it, such as expected interest rate moves and growth differences.
Readers can then judge for themselves when the assumptions change, and good strategists publish updates when they change their mind, instead of quietly dropping an old view. Forecasting currencies is difficult, and even the best analysts are often wrong, especially over short periods.
Surveys of forecasts regularly show wide disagreement. For this reason, companies should treat a strategist's view as one input and should not build their business plans on a single prediction.
The practical value of a strategist often lies in framing risks rather than in picking exact levels. They identify the events that could move a currency, such as a central bank meeting or an election, and they set out what would happen in different scenarios.
A treasurer can then decide how much protection to buy. Typical training includes economics or finance degrees and, increasingly, data analysis skills.
Many strategists come from central banks or trading desks, and some hold professional qualifications. Anyone relying on their work should remember that a bank's strategist may also have a commercial interest in the client's trading activity, so reading research from more than one source is a sensible safeguard.
In practice
Real-world examples.
Example
A strategist at a large bank publishes a note saying that the dollar is likely to weaken against the euro over six months because interest rate differences are narrowing. A manufacturer that sells to Europe reads the note and decides to hedge a bigger share of its future euro receipts. The treasurer keeps the note on file to explain the decision. If the dollar rises instead, the board can see why the hedge was chosen.
Example
A strategist at an asset manager advises the fund's portfolio managers on how much of their overseas holdings should be protected against currency moves. She sets out three scenarios with different probabilities and the likely effect on portfolio returns. The investment committee chooses a 50% hedge ratio.
Example
A corporate treasurer hires a freelance currency strategist to advise on a plan to expand into South America. The strategist explains the local inflation trends and the likely path of the exchange rate. The treasurer adds a currency buffer of 8% to the project budget. On a $5,000,000 project, that sets aside $400,000 for exchange rate swings.
Case study
Seen in the real world.
This fictional story is illustrative only. Kingsford Exports is an invented company that sells machinery abroad and receives about $12,000,000 a year in foreign currency.
The finance director subscribes to research from a bank's currency strategist, who forecasts that the foreign currency will weaken by about 6% over the year. Using that view, the company hedges 60% of its expected receipts with forward contracts. The remaining 40% is left unhedged to allow for the possibility that the forecast is wrong.
By year end the currency has weakened by 4%. The hedge protects 60% of the receipts, and the unhedged portion loses about $190,000. The finance director records that the forecast was directionally right but not exact, and the company keeps its policy of hedging a fixed share of exposure instead of changing it with every forecast. The board asks why the company did not hedge everything. The finance director explains that a full hedge would have removed the chance of gain if the forecast had been wrong, and that the policy of a partial hedge balances protection against flexibility.
Watch out
Common mistakes.
- Treating a forecast as a promise. Currency forecasts are often wrong, especially for short periods.
- Ignoring the assumptions. A forecast without its reasoning cannot be updated when conditions change.
- Forgetting possible conflicts of interest. A bank's strategist may work for a firm that earns fees from clients' trades.
Questions
People also ask.
What does a currency strategist do?
They forecast exchange rates, explain the drivers and suggest trades or hedging strategies.
How is a strategist different from a currency trader?
A strategist focuses on analysis and advice, while a trader buys and sells currencies to make money or manage risk.
Do companies need a strategist?
Most do not hire one, but they often use bank research to inform their hedging policy, and larger treasury teams may build their own views.
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