FX Market Inefficiency Leaves Money on Table for Profit Seekers

(Bloomberg) -- Inefficiency in the $5.1 trillion-a-day foreign exchange market makes it fertile ground for investors seeking to maximize returns, in the view of strategists at Deutsche Bank.

Roughly half of investors in currency markets have motives besides profits, including central banks and corporations. The mismatch leaves “money on the table” for investors strictly looking to boost their bottom line, according to a report from strategists including global co-head of FX research George Saravelos.

“The FX market is likely to continue to offer excess returns to investors for the foreseeable future,” the strategists said. “Currencies as an asset class are ‘alive and kicking.’”

Data from sources including the Bank of International Settlements, the Commodity Futures Trading Commission and the Depository Trust and Clearing Corp. show that an estimated 40 to 55 percent of FX market participants are likely to be liquidity-seeking investors, according to the report. Along with central banks, those players include retail participants, banks, international investors and others who enter the currency markets for reasons other than profiting from shifting exchange rates.

It adds up to the rich potential for returns from currencies, according to the report. That can be seen in the 8 percent average annualized returns since 1980, compared to 7 percent for bonds and 9 percent for equities. The study compares the Deutsche Bank currency returns index, which averages carry, valuation, and momentum strategies, against the J.P. Morgan Global Government Bond index and the MSCI World Equity Index.

“FX appears to offer most value to global portfolio managers in terms of diversification, and on this basis alone should have a fairly large weight in any portfolio,” the strategists wrote.

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