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Forex as an Asset Class

12/16/2012 6:00 am EST

Focus: FOREX

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

Forex is not just for day traders anymore. Kathy Lien says that institutional investors and traders now use them for diversification and to express opinions on global markets.

When talking about the currency market, we often think about short-term day trading, short timeframe analysis.  The currencies aren’t just for day traders anymore.  Forex can also be an asset class, Kathy, is that true?

Very much so, I mean, I think one of the things that all of the trouble in the global economy has taught us and the financial crisis is the need for diversification.  I think that what you’re seeing is a lot of institutional investors and traders are adding forex as a slice of the pie.

Because you have exposure in equities, you may have exposure in bonds, you may have some exposure in commodities, so perhaps you want to consider a little bit of diversification into currencies especially since a lot of the problems in the US markets are being caused by issues abroad.  Given that’s being caused by issues abroad, you may be able to express your opinion on the issues abroad through currencies that may not be as readily expressed through specific stocks per se or even indices.  I think that’s definitely something to consider, and I think it’s something that’s growing in popularity.

Is it practical, or even possible, to buy and hold a currency for a long period of time?

I think it’s definitely possible.  I mean the key here is leverage, right?

Because if you were to hold a currency for long periods of time.  I mean, first and foremost there may be a lot of shorter-term swings, so leverage is something that is offered quite generously in the FX markets, but it can be very dangerous, a double-edged sword.  If you were looking at more as an asset class, as an investment, maybe you want to go cash and cash or you want to just do one to two leverages or something like that.  You know, it’s really something you need to be aware of because leverage magnifies your losses and magnifies your profits.  In the case of investing as an asset class because you’re looking at it from a longer-term perspective, you may want to look at it as something that is less as a speculative instrument and seriously consider it as cash and cash.

Let’s say the fiscal cliff is avoided and the economy starts to grow and we all breathe a big sigh of relief and stocks go up, what currency payers stand to gain the most from a resolution of that fiscal crisis?

That’s a very good question.  In terms of the currencies that would benefit significantly from the fiscal cliff, I think it’s really a story of growth ere.

First and foremost, I’d like to say that the currency pair that I feel is best to use to express how the US economy is doing is dollar-yen.

The dollar yen has been under quite a bit of pressure from the fiscal cliff.  I think if there’s a positive resolution meaning suddenly the Republicans and Democrats are able to reach a deal before the end of the year, magically we get to avert the fiscal cliff, which I don’t know.

It almost seems impossible to imagine.


While we’re sitting here, it seems impossible.

We never know.

No, we never know.

If that happens, I think that it would probably be very bullish for dollar-yen because it would also be a positive for stocks; dollar-yen has a nice little correlation with that.  I also think that you should consider countries are not doing so poorly and risk currency like the Australian dollar for example.  That has been held back by some of the risk aversion in the market and just general concern. Their economy hasn’t been doing that horrid, so I think that if we do get a positive resolution to the fiscal cliff that we could see some upside in the Aussie dollar.

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