The global equity market fell sharply last week, as investors grappled with uncertainty surrounding U.S. budgetary discussions, and U.S. investors had even more declines to contend with on the currency front—especially those investing in Japan.
Indeed, financial markets are all but convinced that next month’s elections in the Land of the Rising Sun will conclude with new leadership that is more committed than ever to weaken the yen through considerably more aggressive quantitative easing measures.
Additionally, U.S. investors in Brazil suffered losses last week, amid growing views Brazil’s central bank was prepared to encourage the country’s currency, the real, to weaken against the dollar.
Fluctuating currency crosses, as shown in our weekly Currency Impact Report, don’t become real gains or losses until U.S. investors exit those positions. Nevertheless, they have become a much bigger—and underappreciated—part of returns in modern globalized investment markets.
Below are last week’s noteworthy talking points on the currency front:
Brazil’s real was one of the biggest movers last week, as U.S. investors in Brazilian equities saw returns of -2.97 percent, while local Brazilian investors saw returns of -1.73 percent. The real fell, extending its biggest weekly drop since June, on speculation that the Brazilian central bank would allow for the real to weaken against the U.S. dollar.
In Asia, the Japanese yen took a heavy toll, as U.S. investors in Japanese equities had returns of 1.17 percent, while local Japanese investors saw returns of 4.02 percent. The differential of -2.37 percent was a direct result of the yen’s decline to a six-month low as investors speculated that Japanese elections next month will hand power to an opposition party that favors aggressive monetary stimulus.
Europe remained relatively muted on the currency front as returns of U.S. investors fell largely in line with those of local investors. European finance officials are due to meet this week to discuss the next steps with regard to Greece’s next aid payment. It’ll be left to see to what extent a Greek exit may already be priced into the euro.
