There is recent evidence that Europe is becoming more Japan-like in displaying negative correlations between its equity markets and its currency moves. This negative correlation in Europe is not a new phenomenon:
One of the most important trends in the markets in 2014 has been the rise of the U.S. dollar and the collapse of the euro and the yen. We’ve written a lot about utilizing hedged equity stategies to isolate international equity markets without adding the layer of euro and yen exchange rate risk.
It is a common misconception that, because an ADR is traded in U.S. dollars in the United States, there is no exchange-rate risk. But that’s not the case. Here’s why.
The discussion of currency-hedged strategies has shaken some of the core beliefs of investors. Traditional investment vehicles that package equity risk plus a secondary currency risk on top of the equity risk have been referred to as the traditional “plain vanilla” exposure because they were the first to the market, and it is what investors have been using for so long.