How Currency Experts Will Ride Thursday's Forex Rollercoaster

  • Comey’s testimony could be key moment for Trump: AMP’s Naeimi
  • Pound vulnerable if May stumbles; Amundi bullish on Europe FX

Bloomberg's Kevin Whitelaw previews former FBI Director James Comey's testimony before the Senate Intelligence Committee. He speaks with Bloomberg's Joe Weisenthal, Julia Chatterley and Scarlet Fu on 'What'd You Miss?' (Source: Bloomberg)

Go long the euro. Short the pound. Sell Brazil’s real, the Mexican peso and South Africa’s rand.

These are some of the strategies managers are adopting as they brace for Thursday’s trifecta of disruptions. AMP Capital Investors Ltd.’s Nader Naeimi sees former FBI Director James Comey’s testimony as the biggest wildcard. But he also thinks U.S. bond yields are close to their bottom and the dollar will gain versus emerging-market currencies. Amundi SA, which oversees more than $1 trillion, is bullish on Europe.

Comey’s appearance before a Congressional panel about his investigation into Donald Trump campaign’s ties to Russia will come just hours after the European Central Bank’s meeting in the Estonian capital, Tallinn. Euro bulls are eager for clues on whether policy makers will consider unwinding bond purchases. The pound faces its latest Brexit moment on the same day, as the U.K. holds a general election.

There’s more uncertainty brewing next week. The Federal Reserve is expected to raise interest rates June 14 and may offer guidance on both further increases and its thinking on when to start trimming its $4.5 trillion balance sheet. Treasuries have rallied this quarter, with 10-year yields dropping Tuesday to the lowest since November as traders lose confidence economic growth and inflation will accelerate.

“Comey’s testimony is likely to be the highlight,” said Naeimi, who heads a dynamic investment fund in Sydney at AMP Capital, which oversees $120 billion. “Looking at the market positioning, investors have turned too pessimistic on growth, so the Fed and ECB can lead to large bond-market volatility.”

The decline in Treasury yields helped send the Bloomberg Dollar Spot Index to an eight-month low Tuesday. Investors have grown skeptical of so-called reflation trades -- which drove up the greenback and yields on optimism the Trump administration would enact promises to boost spending. Washington has shown few signs of moving forward with tax and spending reforms.

“I have been of the view that the dollar has seen its peak, but no downtrend unfolds in a straight line,” Naeimi said. “The dollar is about to flex its muscle as bond yields bottom soon.”

Comey will publicly describe conversations with Trump but stop short of saying if he thinks the president sought to obstruct a federal probe of Russia’s role in the 2016 election, according to a person familiar with the former FBI head’s thinking. Separately, U.S. Attorney General Jeff Sessions had suggested in the past several weeks he might resign amid a widening rift with President Donald Trump, according to a person familiar with the matter.

QuickTake: Unwinding the Twists, Turns in Trump-Russia Probe

Amundi is bullish on European currencies. While there’s increased political uncertainty in Washington, the immediate risk in the euro area has subsided following Emmanuel Macron’s victory in the French election last month, according to Europe’s largest asset manager. Euro-area economic prospects have also improved, while U.S. data have disappointed.

“There is an increasing divergence between the U.S. and euro zone in terms of political, economic, investment flow momentum,” said James Kwok, London-based head of currency management at Amundi. “While the Fed is expected to hike, the big focus will be more on how ECB will implement the exit strategy.”

Ninety percent of respondents in a Bloomberg survey said the ECB will use its meeting on Thursday to acknowledge the risks surrounding the euro area’s recovery are balanced. Beyond that, the 60 analysts are split on whether the central bank will remove its easing bias on interest rates, and the proportion expecting an announcement by September on the future of the bond-buying program has fallen since the previous survey.

The euro has strengthened about 7 percent against the dollar in 2017 after dropping in each of the previous three years.

Keith Dack, a senior portfolio manager at Kit Trading Fund in Singapore, said he doesn’t hold any position in the greenback, preferring to “play the crosses.” The hedge-fund manager, who has more than 30 years of trading experience, is betting on gains in the euro and New Zealand dollar and declines in the pound and the Australian currency.

The money managers’ other positions include:

  • AMP Capital’s Naeimi
    • Holds short positions in the Brazilian real, Mexican peso and South African rand against the dollar as he reduces his fund’s emerging-market holdings significantly in favor of Japanese shares
    • U.S. bond yields have priced in most of the bad news
    • “As bond yields and the dollar rise, EM equities are likely to underperform, while Japanese equities should benefit,” he said. “The currency market looks a perfect place to hedge equity exposure right now”
    • The manager’s flow and sentiment indicators show emerging-market currencies have become crowded trades
    • Impeachment proceedings “highly unlikely” with Republican leadership in the House and Senate even though Comey’s testimony might have a short-term impact
  • Amundi’s Kwok
    • Sees gains in euro, Sweden’s krona, Norway’s krone
    • Pound will also strengthen if Prime Minister Theresa May’s Conservative Party achieves a majority in parliament
    • “We expect a continued recovery of the European currencies, both in the near and medium term”
  • Kit Trading Fund’s Dack
    • Has been holding long EUR/GBP position
    • “That seems to be the best way to play the upcoming ECB meeting and U.K. elections,” he said. “The ECB is likely to change the wording to highlight the improvement in the European economy”
    • Despite recent polls, May is likely to win with an increased majority in parliament, reshuffle the cabinet and pursue a harder Brexit
    • Holds short GBP/NZD, AUD/NZD
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