Currency Traders’ Strategies Foiled as Trends Go MissingNeal Armstrong
Currency traders are having their worst start to a year since 2010 as a dearth of trends in major foreign-exchange markets crushes their investment strategies.
Deutsche Bank AG’s Currency Returns Index has dropped 0.2 percent since Dec. 31, dragged down by momentum trading, where investors looks for consistent moves in one direction. The gauge, which is also based on techniques including carry and valuation, rose in 2013 by the most in four years.
As emerging-market currencies from Argentina’s peso to South Africa’s rand plunge, managers are drawing little benefit from strategies designed to provide returns in times of both economic decline and growth. It’s the latest bad news to hit the foreign-exchange industry as funds see withdrawals, regulators probe allegations that traders rigged benchmarks and a push toward electronic trading leaves some dealers facing redundancy.
“Anyone who has tried to focus on major currencies this year would have struggled,” said Steve Barrow, the head of Group of 10 research at Standard Bank Plc in London. “Trading conditions have been quite difficult and some currencies are really not trending at all.”
Deutsche Bank’s index, which gauges returns in the currency market by replicating typical trading strategies, fell to 205.35629 on Feb. 19, the lowest level since December. It advanced 2.3 percent last year, the biggest increase since a 6.3 percent jump in 2009.
The German bank’s Momentum Excess Returns index is down 1.1 percent since Dec. 31. That’s confounding a Bank of America Corp. declaration on Jan. 21, from strategists including John Hopkinson, that the U.S. Federal Reserve’s decision to start slowing bond purchases would boost the dollar and make this a “break-out year for momentum trading.”
The greenback is stalling versus major peers as traders grapple with a U.S. recovery blown off course by a harsh winter. The Bloomberg Dollar Spot Index is up 0.1 percent this year, after rising 3.3 percent in 2013. The euro is stagnating as the European Central Bank ponders further measures to boost the flow of cheap money, while a shakeout in emerging markets is causing bigger price swings as China’s growth slows and the Fed reduces stimulus.
Reports this month and last showed U.S. jobs growth was less than economists forecast. An Institute for Supply Management index showed manufacturing expanded in January at the weakest pace in eight months, while data today showed sales of previously owned homes dropped in January to the lowest level in more than a year. The Fed has cut its bond purchases to $65 billion a month from an initial $85 billion.
“Since the beginning of the year, trends in G-10 currencies have dropped off markedly,” said Oliver Harvey, a London-based strategist at Deutsche Bank. “We haven’t seen the emergence of a wide bullish-dollar trend. In fact, the dollar trend has more or less disappeared.”
Deutsche Bank is sticking with its call for the dollar to rally this year, according to an e-mailed note yesterday from Bilal Hafeez, the global head of foreign-exchange strategy at the biggest German lender.
Investors seeking to profit from the dollar rising versus the euro, the most actively traded currency pair, are seeing low volatility, restricting the potential to make money.
The shared currency is on track for its narrowest ever trading range versus the dollar for the first two months of a calendar year. Implied three-month volatility for the euro versus the dollar, a gauge of future price swings, dropped to 6.39 percent yesterday, the lowest since 2007.
Strategists forecast the euro will fall 6.9 percent this year to $1.28 from $1.3749 as of 10:10 a.m. in New York, according to the median estimate in a Bloomberg News survey. That hasn’t been the case so far as the ECB refrained from adding further stimulus that tends to weaken a currency at the first two policy meetings of 2014, even with the euro-area inflation rate matching the lowest level since November 2009 last month.
The euro is also benefiting from bond and stocks investors returning to buy euro-area assets as the region emerges from a debt crisis that pushed sovereign-bond yields of Italy and Spain to the highest in the history of the currency bloc. Spain sold 10-year bonds at the lowest yield since 2006 yesterday.
“If there’s one area where there’s not a trend in currency markets, it’s the euro,” said Neil Jones, the head of European hedge-fund sales at Mizuho Bank Ltd. in London. “I would look to sell rallies in euro volatility.”
Quantitative hedge funds that follow market trends saw investors pull $4.9 billion in the last three months of 2013, the most in five years, according to Chicago-based data provider Hedge Fund Research Inc. That followed outflows of $1.1 billion in the second quarter and $668 million in the third, HFR said.
Parker Global Strategies LLC’s Global Currency Managers Index is down 1.8 percent this year and hasn’t had an annual advance since 2010.
Traders in the $5.3 trillion-a-day currency market are under pressure after at least 12 regulatory authorities opened investigations since Bloomberg News reported that dealers colluded to manipulate benchmarks. At the same time, a push toward electronic transactions means some banks are cutting back on staff numbers.
Instead of discussing a plunge in the yen or euro fluctuations caused by the debt crisis, global finance chiefs at a meeting of Group of 20 policy makers in Sydney are instead focusing on a spat between the U.S. and emerging markets over the wind-down of Fed stimulus and its influence on currency markets. The group will back the normalization of monetary policy in advanced economies, according to a draft communique seen by Bloomberg News.
Central banks in Turkey, India and South Africa raised interest rates this year in an attempt to halt their currencies’ depreciation as the Fed’s moves caused some investors to exit those markets. A Bloomberg index tracking 20 emerging-market exchange rates has fallen 1.6 percent this year, following a decline of more than 7 percent in 2013.
That turbulence boosted demand for the yen as a haven, tempering bets that unprecedented monetary stimulus will cause the Japanese currency to weaken further following its depreciation versus 15 of 16 major peers last year.
The yen has appreciated 3.1 percent this year against a basket of its developed-nation peers, making it the best performer of the 10 currencies tracked by Bloomberg Correlation-Weighted Indexes.
A lack of trends in currency markets has been a source of frustration this year, according to Paul Lambert, Insight Investment Management Ltd.’s currency head.
His bets that the Australian dollar and its Canadian counterpart would both weaken relative to the greenback were looking profitable in January but reversed this month, leaving the 238 million-pound ($397 million) Absolute Currency Fund that he manages little changed for the year.
“There aren’t many currency pairs that have trended in the same direction in January and February,” Lambert said in a Feb. 18 interview. “Having a clear view of where the macro trends are going is very difficult at the moment. It’s an environment where we’ll run relatively low levels of risk and look to engage more aggressively when the picture becomes clearer in one direction or the other.”