Carry Trades Ease Pain as Russia and Turkey Give Boost

Foreign-exchange traders suffering their worst year on record are finding solace in a strategy that relies on high-risk currencies to generate gains.

While Parker Global Strategies LLC’s Global Currency Managers Index of 14 top funds has fallen 2.2 percent this year, a Deutsche Bank AG gauge of trades exploiting differences in global interest rates gained 2.3 percent.

The diverging fortunes suggest that many investors aren’t willing to gamble on currencies of countries such as Chile, Russia and Turkey that have even outperformed returns from the so-called carry trades measured by the Deutsche Bank index. The peso and ruble rallied 2.7 percent and 2.2 percent against the dollar last month, the most among 31 major currencies tracked by Bloomberg. The lira finished the month 0.8 percent stronger.

The Parker index’s returns are “indicative of people being slow to pick up on carry or reticent to really back carry,” said Alan Ruskin, global head of Group of 10 foreign exchange at Deutsche Bank in New York. “The emerging-market growth story is unconvincing,” particularly for currencies of nations with relatively high rates, he said in a May 30 phone interview.

Carry Rises

Deutsche Bank’s G-10 FX Carry Basket index is up almost 5 percent since the end of January, which was its worst month since the previous June.

The Parker index, which began in 2003, has fared less well. Until this year, the worst annual start for the measure came a decade ago in 2004, when it tumbled 1.4 percent from January through May.

That carry is among the few bright spots in the $5.3 trillion-a-day foreign-exchange market is a consequence of a drop in volatility to pre-financial crisis levels, which is flattening out many of the trends that traders exploit for profit. It also makes carry trades more reliable by reducing the chance the deal will be upended by sharp swings in exchange rates.

The funds that gained “are the ones that have more wholeheartedly gone into those carry trades,” Paul Lambert, the head of currency at Bank of New York Mellon unit Insight Investment Management, which oversees about $485 billion, said May 28 in a phone interview.

U.S. Treasuries due in 10 years yield 2.55 percent, compared with 1.40 percent for German debt and 2.30 percent for Canada’s. Turkey’s local-currency bonds yield 8.9 percent and Russia’s 8.53 percent.

Maintaining Rates

Near-zero benchmark rates by most major central banks for more than five years have dimmed movements in foreign exchange. While the Federal Reserve began in December to scale back its monthly bond purchases, or quantitative easing, policy makers have recently made clear that rates won’t be rising anytime soon.

Fed Chair Janet Yellen testified to lawmakers May 7 that the central bank will probably end its bond purchases in the fall if the labor market continues to improve, though she also said “a high degree of monetary accommodation remains warranted.” European Central Bank President Mario Draghi said May 8 that he was comfortable with easing monetary policy further at the bank’s next meeting on June 5.

The Bank of Japan is also purchasing government bonds as part of its monetary easing steps to help in reflating the economy. The central bank will buy about 6 trillion ($59 billion) to 8 trillion yen of debt per month.

Price Swings

JPMorgan Chase & Co.’s Global FX Volatility Index fell to 6.07 percent on May 30, its lowest level since the start of the financial crisis in mid-2007 and down from a peak of 27 percent the following October.

Some of the best-performing currencies were also the riskiest. Tensions between the U.S. and other western powers and Russia are at the highest since the Cold War amid the Ukraine crisis. Turkey’s central bank more than doubled its benchmark interest rate in January to defend the currency and stem inflation.

“Russia is paying a fairly good interest rate and Turkey is paying a ton,” John Taylor, the founder of FX Concepts LLC, which was the largest currency hedge fund before it entered bankruptcy in October, said May 28 in a phone interview. “You got that thing moving strongly in your direction, but you don’t have many people on that trade. That’s been the best trade out there.”

Deutsche Bank’s Momentum Excess Returns index dropped 1.8 percent in May, after falling every month this year. Momentum strategies seek to capitalize on the theory that currencies typically trend over time.

“One key trading mantra, after all, is that ‘the trend is your friend,’ so the trendless currency market has left many investment managers friendless,” Alvin Tan, a London-based director of foreign-exchange strategy at Societe Generale SA, wrote in a May 29 note. “The lack of trends, however, has not been a hindrance to carry strategies.”

To contact the reporters on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Paul Armstrong

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