Beware the Consensus Trades as Franc Shorts Lose With Bond Bears

Add the Swiss franc to short sellers’ growing list of pain trades.

Speculators who increased bets against the currency to the highest since June 2013 this month got burned by a record surge on Thursday after the Swiss National Bank’s shock decision to scrap its euro cap. A global rally in bonds has confounded the biggest wagers against Treasuries in four years, while a Goldman Sachs Group Inc. gauge of the most-shorted U.S. stocks suggests hedge funds bet wrong in the past three months.

The losses show how even the most-popular trades are getting upended as volatility across global markets increases and world economic growth slows. The franc jumped as much as 38 percent against the dollar yesterday while 10-year Treasury yields fell to a 20-month low. The Standard & Poor’s 500 Index is trading within 5 percent of a record high after surging almost threefold since March 2009.

“Beware the consensus trade!” said Chris Weston, chief market strategist in Melbourne at IG Australia, a unit of IG Group Holdings Plc. “2015 is going to be the year of surprises. We need to be more nimble.”

The SNB ended its three-year policy of capping the franc at 1.20 per euro a week before the European Central Bank meets to discuss government-bond purchases to boost the euro-area economy. The move surprised traders after SNB Vice President Jean-Pierre Danthine had called the franc cap a “pillar” of monetary policy on Jan. 13.

Anything Goes

“You wake up this morning in foreign exchange and you find that literally anything can happen,” Nick Parsons, the London-based head of research for the U.K. and Europe at National Australia Bank Ltd., said by phone from Sydney. “This was utterly inconsistent with anything that had been said over the last three years.”

The franc weakened 4.1 percent to 87.46 centimes per dollar at 7:55 a.m. in London, paring its advance this week to 16 percent.

Losses mounted from the Swiss currency shock as FXCM Inc., the largest U.S. retail foreign-exchange brokerage, said clients owe $225 million on their accounts, threatening its compliance with capital rules. A New Zealand-based dealer, Global Brokers NZ Ltd., said the impact on its business is forcing it to shut down.

Traders had increased bets on a decline in the franc against the dollar to a net 24,171 contracts in the week ended Jan. 6, the most since June 2013, according to the latest data available from the Commodity Futures Trading Commission in Washington.

Treasury Bears

Similarly, short positions that gain when U.S. 10-year notes fall outnumbered longs by 261,282 contracts on the Chicago Board of Trade in the week ended Dec. 30, the biggest wager against Treasuries since May 2010, according to the CFTC.

The Bloomberg U.S. Treasury Bond Index returned 2.5 percent this month through yesterday, adding to a 6.2 percent gain in 2014. The benchmark U.S. 10-year yielded 1.72 percent, after dipping to 1.70 percent yesterday, the least since May 2013, according to Bloomberg Bond Trader data.

The World Bank cut its forecast for global expansion this year, as an improving U.S. economy and low fuel prices fail to offset disappointing results from Europe to China. Growth will be 3 percent in 2015, down from a projection of 3.4 percent in June, according to the lender’s semiannual Global Economic Prospects report, released this week in Washington.

A Goldman Sachs gauge of the stocks most-shorted by hedge funds has increased 9.4 percent in the past three months, versus a 7 percent gain for the S&P 500.

Trader expectations for price swings in foreign-exchange markets surged to 12.11 percent following the SNB’s shock decision, the highest since June 2012, according to Deutsche Bank AG’s Currency Volatility Index. It was at a record-low 4.93 percent as recently as July.

Investors willing to stomach those price swings may be able to find bargains, IG’s Weston said.

“There’s definitely some hurt out there,” said IG’s Weston. “But people who shy away because of what we saw yesterday are going to miss some of the greatest short-term opportunities that we’ve seen in a long, long time.”

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