Broken Bond Markets Drive Aussie Fund Manager to Currency Trades

  • QIC oversees about $23 billion in its fixed-income funds
  • Cites low yields, Fed-driven risk of declines in bond prices

One of Australia’s largest fund managers says broken bond markets have driven it to try active currency trading as it seeks assets that better reflect economic and policy shifts.

QIC Ltd. began seeking to profit from exchange-rate strategies for the first time this month in its fixed-income funds, where it oversees about $23 billion. The money manager, which will trade seven major currencies, expects the Australian dollar to drop at least 3.5 percent to below 70 U.S. cents over the next three months while the yen will climb to about 118 per dollar.

With bond buying by the European Central Bank and Bank of Japan driving mid-term sovereign yields below zero and U.S. policy tightening increasing the risk of capital losses from bonds, currency markets offer the potential for better returns, according to Brisbane-based QIC Ltd. That’s not to say profits are easy to come by with an index of the top foreign-exchange funds on pace for its biggest annual drop since 2011.

“Monetary policy is more being reflected in currency markets than rates markets, and hence we felt like we’ve had a bit of a hand tied behind our back,” said Susan Buckley, the managing director for global liquid strategies at QIC. Currency positioning “gives us another lever to reflect our macro views in this very low-yielding environment.”

Average 10-year yield across U.S., Germany, Japan fell below 1% in 2015
Average 10-year yield across U.S., Germany, Japan fell below 1% in 2015

Foreign-exchange markets this year have been rattled by a string of central bank surprises beginning with the Swiss National Bank’s January decision to end a cap on the franc’s strength, which triggered the currency’s biggest gain on record. Since then, policy easing by the ECB, signals from the Federal Reserve of an impending tightening and China’s surprise yuan devaluation in August, to name a few, have offered traders ample opportunity to position for changes in foreign exchange levels.

The Reserve Bank of Australia lowered its benchmark rate twice this year to a record-low 2 percent and reiterated in minutes of a December meeting released Tuesday that the inflation outlook gives scope for further easing if needed. Low interest rates are supporting household spending and a weaker exchange rate is aiding local firms, the RBA said.

The performance of the Parker Global Currency Manager Index of top funds shows the difficulty of picking winners in the current environment. It has lost 0.3 percent this month to extend its slide in 2015 to 2.3 percent.

Among Group of 10 currencies, having a bullish view on the dollar was a winning trade this year with the greenback gaining versus all its peers apart from the franc. Commodity-linked currencies have led losses with the Canadian dollar 15 percent weaker and the Norwegian krone down 14 percent this year.

QIC will trade in the greenback, euro, yen, pound, Aussie, Canadian and New Zealand dollars. Its strongest view currently is for continued weakness in Australia’s currency, said Katrina King, the fund manager’s director of research and strategy.

“We’d be looking for that to fall from here, particularly on that terms of trade, iron-ore outlook,” she said. The Aussie will probably trade in the high 60-cent level over the next three months, according to King.

QIC’s currency strategies will run independent of any daily rebalancing or hedging that’s done with respect to its portfolios, said Buckley.

The Aussie dollar has stabilized after touching a 6 1/2-year low of 68.96 U.S. cents in September to trade at 72.54 cents as of 11:45 a.m. in Sydney on Tuesday. Its gains this quarter have come even after Australia’s chief export iron ore dropped 31 percent as growing supply of the material faces a market where demand from China is easing.

Higher Yields

Australia’s dollar may also face headwinds from the prospect of tighter U.S. monetary policy, with futures markets pricing in a 76 percent chance the Federal Reserve will lift its benchmark rate Dec. 16. The move may also drive up yields, not just in the U.S. but around the world.

Economists predict 10-year sovereign yields will climb across developed markets next year as the U.S. tightens policy and central bank easing from Australia to Japan and Europe begin to spur economic growth. 

“If you are a benchmark-driven investor, you are naturally long rates so you’re going to feel some pain as that rate rise comes through off the zero bound,” in the U.S., said King. “So, your capital gain on rates can be quite sensitive right now if you’re someone who’s just very benchmark driven and currency doesn’t have that kind of profile to it right now.”

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