If you’ve ever been soaked to the bone in a downpour the day the local weather report foretold only scattered showers, you have an inkling of the difficulty of setting currency strategy.
But an inaccurate weather forecast earns only momentary public scorn. An off-target prediction about the direction of currency movements can hurt the bottom line.
The Currency Strategy team, part of Wells Fargo’s FX Risk Management Group, helps corporate customers identify and mitigate currency exposures to protect their profits from market fluctuations. It’s a tall order, requiring the team to plug into the right sources of information and assign the correct weights on factors influencing the market, but the team carries it out with striking success. In fact, Bloomberg has ranked the team the number one most accurate forecaster for a remarkable four quarters in a row. So how does the team routinely achieve outstanding results?
To shape a coherent view of the market, the team analyzes the torrents of up-to-the-minute intelligence that stream into its office, from newswire and newspaper reports, statistical data releases and central bank commentaries, as well as the ongoing financial market activity and price action, carefully considering key factors economic fundamentals such as growth and inflation, budget and monetary policy maneuvers, market positioning and market technical. After assessing all of these factors, the team delivers its prognostication and it is often, but not always, in line with other forecasters’.
“There will be large areas of agreement,” Nick Bennenbroek, head of Currency Strategy and a familiar face in business media, admitted. “We’re not contrarians who make calls solely to set ourselves apart from other analysts or from the collective judgment of the market.”
To competently formulate currency strategy, you need to know the rules and how to adhere to them. But to excel, intuition and confidence come into play.
Said Nick, “When your views differ and your opinion isn’t strongly supported by the movement of the market, you must have faith that your hunches will be borne out over time.”
This credo was put to the test this summer when the team found itself markedly out of step with its colleagues.
“There was intense concern in Europe regarding the debt crisis, particularly in Spain and Italy, and the accompanying stress on the euro,” said Nick. “The European Central Bank president, Mario Draghi, made forceful comments that bond market conditions were unacceptable, and that trading was being driven by fears that the euro could break up.”
The team’s reaction to the ECB’s remarks?
“We felt that the central bank would do whatever was needed to calm the market. Our opinion wasn’t a widely held view and certainly wasn’t reflected by the activity of the bond market. Amidst the skepticism, however, we maintained that those statements signaled an evolution in the European Central Bank’s thinking.
“Since then,” noted Nick, “there have been dramatic improvements in the market, and the broader consensus of the market and analysts’ opinion has come around to our way of thinking.”
Correctly sensing the shift in markets at an early stage had potentially significant benefits for customers in managing their foreign exchange opportunities and risks.
Asked whether the team’s role was more science than art or vice versa, Nick, who holds a bachelor’s degree in management studies and a master’s degree in economics, said that his tasks move along a continuum between the two. He also alluded to what is possibly the critical factor in his team’s success: substantial real-world experience.
“Our work is predicated on a sound economic analysis and judgment,” he said. “After you’ve been doing this long enough you do get a sense of how markets and central banks will act and react, and of how much of a move is too much.
In the end, accurate financial markets foretelling will sometimes mean breaking from the herd and acting on well-honed instinct, said Nick. “If the market challenges you, you hold on.”