"It is a riddle, wrapped in a mystery, inside an enigma." ~Sir Winston Churchill
Churchill's well-known words describing Russia applies equally well to the topic of currency management. Among the various spheres of investing there is perhaps none more unpredictable or volatile than the behaviour of foreign exchange (FX).
This paper describes Western Asset's approach to active currency management within fixed-income portfolios, which is based on three key tenets:
- currency risk should not dominate fixed-income risk in a bond portfolio
- currencies can provide strong diversification benefits in addition to adding value
- there is no 'right way' to determine currency drivers; a pragmatic and flexible approach is key.