Currency wars

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Mitchell Fraser-Jones 16 December 2015 Est. reading: 2 min read

The Federal Reserve has just announced the first increase in US interest rates in nearly ten years. Janet Yellen, Chair of the Fed, recently described the need for the rate hike as being “a testament… to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession”.

We would agree with this assessment, to an extent, but the operative word in that statement is perhaps ‘our’. The US economy has, by some distance, been the best performing developed economy in the post-crisis world and, in some respects, does appear to have ‘normalised’. But that statement needs to be viewed in the context of just how low interest rates have been and for how long. This is an unprecedented period of economic history and nobody is really sure what normal should look like!

Furthermore, there may be far-reaching consequences of the Fed’s decision to raise US interest rates. The US dollar is still the world’s reserve currency, and when the cost of the dollar rises, it has an impact on individuals, companies and sovereigns that hold dollar-denominated assets and liabilities.

Already, we have seen emerging market economies struggling with the tighter liquidity conditions that have prevailed since the Fed ended its programme of quantitative easing last year. The currencies of many of these emerging economies have been under significant pressure in this period and that looks set to continue. Indeed, conditions may worsen, particularly if these economies feel that their only response to the growing pressures in their domestic economies is to intentionally depreciate their currencies even further.

Nowhere, is this more prominently the case than in China. Already, we have seen China loosening its grip on the renminbi in the face of an economic slowdown that looks like a hard-landing with almost every macroeconomic data-point. US interest rate increases are likely to put more pressure on the renminbi and are likely to increase the Chinese authorities desire to share their economic pain with the rest of the world through further currency depreciation.

Chart showing the exchange rate between the US dollar and Chinese Renminbi from the start of 2014

Although an increase in US interest rates may be justified for the US economy, it is far from ideal for the rest of the world. The pace and extent of future rate increases is likely to be data-dependent, and it is plausible that the Fed will be cautious about hiking further in the next few months. But, in our view, tightening liquidity conditions already represent storm clouds for the global economic outlook.

So forget Star Wars – it’s the prospect of a new episode of Currency Wars that is occupying our thoughts. The dark forces of deflation and secular stagnation may be about to intensify.

With an investment strategy that has been formulated with a challenging economic environment in mind, we feel well-placed to cope with what lies ahead in 2016 and beyond. But we could be in for a bumpy ride next year and it will be as important as ever to be selective and to think long-term.

What are the risks?

  • The value of the fund and any income from it may go down as well as up, so you may get back less than you invested
  • Past performance cannot be relied upon as a guide to future performance
  • The ongoing charges figure is charged to capital, so the income of the fund may be higher but capital growth may be restricted or capital may be eroded
  • The fund may invest in other transferable securities, money market instruments, warrants, collective investment schemes and deposits – some of these security types could increase the fund′s volatility and increase the level of indirect charges to which the fund is exposed
  • The fund may invest in overseas securities and be exposed to currencies other than pound sterling – as a result, exchange rate movements may cause the sterling value of investments to decrease or increase
  • The fund may invest in unquoted securities, which may be less liquid and more difficult to value, because they are generally not publicly traded – the lack of an open market may also make it more difficult to establish fair value

Important information

Before investing, you should read the Key Investor Information Document (KIID) for the fund, and the Prospectus which, along with our terms and conditions, can be obtained from the downloads page or from our registered office. If you have a financial adviser, you should seek their advice before investing. Woodford Investment Management Ltd is not authorised to provide investment advice.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund′s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

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