Funds Flattened by Fleeting Trends Feeds Trader Woes: Currencies

Feb 21, 2014 4:29 am ET

(For a Currencies column daily alert: SALT FXCOL.)

Feb. 21 (Bloomberg) -- 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 0.3 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 industry as funds see withdrawals, regulators probe allegations traders rigged benchmarks and a push toward electronic trading leaves some foreign-exchange 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.”

Confounded Expectations

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, confounding a Bank of America Corp. declaration from strategists including John Hopkinson on Jan. 21, that the U.S. Federal Reserve’s decision to start slowing asset purchases would boost the dollar and make 2014 a “break- out year for momentum trading.”

The Bloomberg Dollar Spot Index, up 0.1 percent this year, is stalling versus major peers as markets grapple with a U.S. recovery blown off course by a harsh winter. The euro is stagnating as the European Central Bank ponders further stimulus. A shakeout in emerging markets created greater price swings as China’s growth slows and the Fed reduces stimulus.

Reports in 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. The Fed has cut its bond purchases to a $65 billion a month from an initial $85 billion.

Dollar Dithers

“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 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 as low as 6.39 percent yesterday, the least since 2007.

Forecasts Upended

Strategists forecast the euro will fall 6.7 percent this year to $1.28 from $1.3719 yesterday 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 inflation rate in the euro area 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.”

Cash Pulled

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 will instead focus on a spat between the U.S. and emerging markets over the wind-down of Fed stimulus, a draft communique shows.

Currency Turbulence

Central banks in Turkey, India and South Africa raised interest rates this year in an attempt to halt their currencies’ depreciation. A Bloomberg index tracking 20 exchange rates has fallen 2 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 3.67 percent so far this year, the best performer among 10 developed-nation 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 head of currency.

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 ($396 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.”

--With assistance from Niki O’Callaghan and Chris Larson in London. Editors: Paul Dobson, Robert Burgess