If we cannot predict currencies consistently, how should we think about currency risk?
Every meaningful investment decision has one thing in common: it is made before the outcome is known. Only afterwards does hindsight rewrite history, and decisions that once involved genuine uncertainty suddenly appear obvious. Foreign exchange markets remind us of this every day.
Unlike many investment risks, currency risk cannot simply be diversified away. Every client investing internationally is exposed to it, regardless of how carefully the underlying portfolio has been constructed. Yet currency risk often receives less attention than the disclaimer at the bottom of a factsheet, not because it is insignificant, but because it is accepted as an unavoidable consequence of investing across borders. The more useful question is whether it should be.
The limits of prediction
Markets are exceptional teachers of behaviour, but poor providers of certainty. Every transaction requires a buyer who believes an asset is worth owning and a seller who believes it is worth letting go. At exactly the same price. Markets therefore don’t reveal certainty; they reveal disagreement.
That distinction matters, because it changes the starting point. If exchange rates cannot be forecast with consistent accuracy, then managing currency exposure should not begin with predicting where the Rand, Dollar or Euro will trade next month. It should begin with understanding which risks deserve to be carried and which deserve to be managed.
Two decisions, not one
This is where currency risk is most often misunderstood. Managing it is not a prediction that a currency will rise or fall. It is a deliberate decision to limit how much an unpredictable market can affect an intended outcome.
Last year offered a vivid illustration. The Rand started 2025 at 18.88 to the US Dollar and closed at 16.55 – a gain of 13%. Consider a South African client whose global equity manager did everything right: identified outstanding businesses, diversified across sectors and geographies, and delivered, say, 10% in Dollar terms. Measured in Rand, that client still went backwards by roughly 3.5%. The investment decision was sound; the currency outcome overwhelmed it.
The quality of the investment decision and the currency outcome are related, but they are not the same decision. Recognising that distinction is where a more meaningful client conversation begins.
A better question for clients
Rather than asking, “Where do we think the Rand is going?”, the more valuable question becomes: “How much currency risk are we comfortable accepting in pursuit of our financial objectives?” That subtle shift moves the discussion away from prediction and towards process and it is a conversation clients respond to, because it acknowledges uncertainty honestly instead of pretending to see through it.
From question to framework
A useful starting frame for advisers is to separate currency exposure into risk worth managing and risk worth carrying.
Currency risk usually deserves to be managed where a client’s future liabilities and their assets sit in different currencies: retirement income to be drawn in Rand from an offshore portfolio, school or university fees payable abroad, a planned property purchase, or an inheritance to be repatriated. Here, an adverse currency move does not merely dent a return, it threatens the purpose the money was set aside for.
Currency risk may deserve to be carried where horizons are long, the exposure is a deliberate diversifier away from South African-specific risk, and no defined liability sits at the end of it. And between the extremes of “fully exposed” and “fully hedged” lies a practical middle ground: partial cover, staged or phased transfers, and forward exchange contracts that fix a rate for a known future obligation. The right mix is a function of the client’s objectives, not of anyone’s currency view.
In our experience, clients who transact according to a predetermined plan behave very differently from those reacting to headlines. They transfer in tranches rather than waiting for a “perfect” rate that may never arrive, and they are far less likely to abandon a sound strategy at exactly the wrong moment.
Process over prediction
Good processes cannot eliminate uncertainty; they simply improve the probability of making better decisions over time. Perhaps the real lesson markets offer is that the objective is not to know the future, it is to ensure that when uncertainty inevitably arrives, the investment process has already accounted for it.
And if currency risk has become an accepted cost of investing globally, why leave it unexamined?
Let’s examine it together
Currency Partners works alongside advisers and their clients every day to structure international transfers and manage currency exposure with intention, from once-off transactions to ongoing hedging programmes.
If you would like a second pair of eyes on the currency exposure sitting inside your clients’ international portfolios, or simply better pricing and process on their next transfer, speak to our team: email enquiries@currencypartners.co.za or call +27 21 203 0081.
