Business Spectrum✨
FOREX
Foreign Exchange Market
The foreign exchange (Forex) market functions as a vast, decentralized global network where currencies are traded directly between participants. It establishes exchange rates for all currencies and encompasses every aspect of currency transactions — from buying and selling to exchanging at current or predetermined rates.
FX Currencies
Currency markets are inherently complex, and at Novexia, we recognize that taking on FX risk typically doesn’t yield consistent rewards over medium to long-term investment periods. Instead, we view currency exposure as a potential source of portfolio volatility that requires strategic oversight and risk management rather than a means to boost returns.
WHY HEDGE? Since foreign exchange movements can significantly amplify portfolio fluctuations — especially for low-yielding fixed income investments — the primary objective for long-term investors is often to minimize volatility. Implementing effective hedging strategies helps maintain stability and preserve the overall balance of an investment portfolio.
Key Highlights
The influence of currency fluctuations on equities is generally smaller than on overall portfolio risk — yet it remains considerable. In regions such as the eurozone and the UK, currency volatility plays a major role in driving equity portfolio swings. Japan stands as an exception, with the yen often moving inversely to the domestic stock market, helping offset some of that risk.
At Novexia, we recommend that investors hedge the majority of their foreign exchange exposure within major developed markets. Our approach favors fully hedging fixed-income positions to limit instability, while maintaining partial hedges for equity holdings — a strategy particularly suitable for European investors. We also outline preferred hedge ratios tailored to typical portfolios and emphasize the benefits of maintaining permanent hedges rather than attempting to adjust dynamically to short-term FX changes.
While selective short-term exposure to FX risk can be reasonable, it’s important to remember that the foreign exchange market — highly liquid and operating around the clock — often reacts first to unexpected global developments. Key factors influencing currency movements include monetary policy and interest rate differentials, investor sentiment, technical indicators, market valuations, and broader economic fundamentals.