Foreign-exchange traders are proving to be among the biggest beneficiaries from the tumble in markets ranging from stocks to bonds and commodities brought on by prospects for higher interest rates in the U.S.
Rising volatility is boosting the Parker Global Currency Manager Index, which jumped 3.29 percent last quarter in its biggest gain since soaring 4.93 percent in the last three months of 2004. The gauge, which tracks returns of 14 leading currency funds, had fallen in four of the previous five quarters and hasn’t had a winning year since 2010, when it rose 0.94 percent.
Diverging policies among the U.S. Federal Reserve and other major central banks are now stoking both the dollar and wider price swings traders can exploit. The gains come too late for firms such as FX Concepts LLC, once the world’s biggest currency hedge fund, that have closed in recent years amid losses.
“What’s generated such strong returns in the quarter has been the view that the U.S. dollar should outperform,” Roger Hallam, the London-based chief investment officer for currencies at JPMorgan Asset Management Inc., which oversees $1.7 trillion, said by phone on Sept. 29. “It has allowed currency managers to claw back their underperformance from earlier this year.”
The MSCI All-Countries World Index of stocks and Bloomberg Commodity Index both fell last quarter. Though the Bank of America Merrill Lynch Global Broad Market Index of bonds rose, it fell in September for the first time this year as the Fed stays on track to raise rates in 2015.
While geopolitical conflicts from Ukraine to Iraq also helped stoke volatility from July’s record low, traders say the bulk of their gains stem from the Fed. That’s supported by the rising correlation between the Parker index and the Bloomberg Dollar Spot Index. In the first half of 2014, there was a lack of trends to exploit as central-bank policies remained in sync.
“It was a difficult environment for us, and for many currency managers, to make money earlier in the year,” Paul Lambert, the London-based currencies head at Insight Investment Management Ltd., said by phone Sept. 25. “Divergence in monetary policy is very supportive in the emergence of trends in currency markets, and that’s beginning to play out.”
Insight is a unit of Bank of New York Mellon that oversees about $470 billion.
The Parker index fell 3.3 percent in the first half, its worst start to a year since Bloomberg began tracking the data in 2003. That followed declines of 1.89 percent in all of 2013, 0.15 percent in 2012 and 6.05 percent in 2011.
Assets managed by funds focused on foreign exchange shrank 6.4 percent in the first half of 2014 to $18.4 billion, after a 20 percent drop last year when firms such as FX Concepts closed, according to data compiled by Hedge Fund Research Inc.
The best year for the Parker index was in 2008, when it jumped 4.74 percent amid the worst global financial crisis since the Great Depression, according to data compiled by Bloomberg.
Bloomberg’s dollar gauge, which tracks the U.S. currency against a basket of the euro, yen, pound and seven other major peers, climbed to 1,074.04 yesterday, the highest level since June 2010 and up from this year’s low of 1,000.59 in May. The measure was at 1,069.11 as of 7:54 a.m. in New York.
The dollar rose 7 percent in the past three months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, followed by the Canadian dollar’s 2.1 percent gain and a 2 percent increase for the Norwegian krone. The New Zealand dollar was the biggest loser, dropping 5.2 percent, trailed by the euro, which fell 1.9 percent.
The 120-day correlation between the Parker and Bloomberg Dollar Spot indexes rose to 0.72, the most since May 2013. A reading of 1 would mean the gauges were moving in lockstep, while minus 1 would mean they were moving in opposite directions. The measure was negative as recently as April.
“We’re seeing the beginning stages of what we think is a multi-year dollar uptrend,” Daniel Janis, a money manager in Boston at John Hancock Asset Management, said by phone yesterday. John Hancock is a division of Manulife Asset Management, which oversees $281 billion, including currencies.
There’s a 46 percent likelihood the U.S. will raise its target federal funds rate from the zero to 0.25 percent range it has been in since 2008 to at least 0.5 percent by July 2015, futures data compiled by Bloomberg show.
Higher rates tend to boost the allure of a currency, and the strength in the dollar coincides with an expansion of the extra yield international investors get by owning two-year Treasury notes rather than similar maturity German bunds to about 0.6 percentage point, the most since 2007. As recently as last year, bunds yielded more than Treasuries.
Gross domestic product in the world’s largest economy grew an annualized 4.6 percent in the second quarter, the fastest pace since 2011. That compares with little or no growth in the euro region and Japan, where central banks are maintaining or expanding currency depreciating monetary stimulus.
The JPMorgan Global FX Volatility Index was at 7.74 percent, up from a record low on a closing basis of 5.29 percent on July 3.
The bigger price swings and gains in the dollar helped boost average daily volumes on ICAP Plc’s EBS platform to $117.9 billion in September, from $81.2 billion a year earlier. The value of trades slumped to $68.5 billion in April, the least in data going back to 2006.
The surge in trading volumes coinciding with a divergence in central-bank policies is a “once in a decade” opportunity to make money, though the sudden jump in returns may encourage some investors to lock in returns and pull back, according to Daniel Brehon, a strategist at Deutsche Bank AG.
“It’s not often you get this clear macro trade,” the New York-based Brehon said in a Sept. 30 phone interview. “A lot of our currency investors are looking to buy dollars, especially when there’s any dip. Still, after a few tough years for currency managers, it’s natural for them to want to take profit, even if there’s a continuation of this trend.”