Hedge funds rework positions in emerging-market decline
February 6, 2014 9:48 am
Traders who expected a year when riskier bets would pay off are overhauling their foreign-exchange positions after an emerging markets rout led to the largest currency-fund declines to open the year since 2004.
Hedge funds and other huge speculators shuffled holdings of the dollar, yen, pound, Mexican peso and four other major currencies by a net 102,115 contracts in the week ended January 28, according to Commodity Futures Trading Commission data. That’s the largest realignment since September, with updated figures due tomorrow. Currencies from the U.K., Japan and Europe saw the largest surge in bets on appreciation, while traders added wagers on pullbacks for Mexico’s and Australia’s currencies.
With the global economy gathering steam, foreign-exchange traders were positioned to take advantage from hikes in riskier assets, even with the Federal Reserve pledging to purchase fewer bonds. They failed to foresee turmoil in emerging markets from China to Argentina that followed a slowdown in U.S. jobs growth as the yen — a favored haven – advanced versus all 31 of its major counterparts this year.
“There’s been a vast re-pricing of risk,” Carl Forcheski, a director in corporate currency sales at Societe Generale SA in New York, said February 5 in a phone interview. “When these dams sometime break, then you have little bit of a move that feeds on itself.”
Currency Funds
The Parker Global Currency Managers Index fell 1.4 percent last month among the 34 funds that reported results to Stamford, Connecticut-based Parker Global Strategies LLC. It was the largest monthly drop since August.
Colombia’s peso led selling by Credit Agricole Group clients of non-Group of 10 currencies in the week ended February 2, according to a February 3 report by the French bank. All transactions in the currency were sales, while 95 percent of Israeli shekel transaction volume was sales. Credit Agricole’s customers increased holdings of Taiwan’s and Hong Kong’s dollars, Brazil’s real and Mexico’s peso.
“What I’m most concerned about is whether the institutional investors, big pension-fund and mutual-fund guys, that they’re also beginning to capitulate, or at least reduce some of the bets that they put on in late 2013,” Adam Myers, European head of foreign-exchange strategy at Credit Agricole SA’s corporate and investment banking unit in London, said February 3 in a telephone interview. “Risk-sensitive currencies will underperform and traditional safe-haven will outperform as long as this capitulation continues.”
Credit Agricole is the world’s fifth-largest bank by assets, according to the company’s website.
China’s Role
SocGen’s Forcheski said the February 3 report showing a Chinese manufacturing gauge fell to a six-month low in January was a trigger for emerging-market currency selling.
China buys everything from Chile’s copper to South Korea’s cars. To cope with the fallout, Turkey and South Africa sought to stem a run on their currencies by raising interest rates and Argentina has experimented with capital controls.
The lira has trimmed its decline this year to 4 percent versus the dollar, after dropping as much as 11.3 percent in January. South Africa’s rand has pared its decline to 5.7 percent in 2014, after falling as much as 8.6 percent last month.
Growth Projections
“The pace of the selloff is likely to diminish,” Ilan Solot, a strategist at Brown Brothers Harriman & Co. in London, said February 4 in a phone interview. “Not to say that it’s all over and we’re going to rally, but the speed of the selloff we’ve seen in the last month or so, I think that’s over.”
The International Monetary Fund raised its global growth projection to 3.7 percent from an October estimate of 3.6 percent on accelerations in the U.S. and U.K. The average projection for 2014 U.S. gross domestic product growth is 2.8 percent, up from 2.6 percent at the start of the year.
Going into 2014, a bet on Mexico’s peso rallying against the yen was a top Bank of America Corp. trade for the year. Danske Bank A/S exited a trade last month buying lira versus Denmark’s krone at a loss of 2.9 percent.
Speculators were net long 22,530 futures positions in bets that the Mexico’s peso would rally against the greenback as of December 13, according to CFTC data. Investors have reversed those positions, holding a net 35,316 contacts betting on a peso decline on January 28.
Payrolls Surges
U.S. payrolls in December increased at the slowest pace since January 2011, a Labor Department report showed January 10, indicating a pause in the recent strength of the U.S. labor market that may partly reflect the effects of bad weather. The U.S. added 184,000 jobs in January, according to economists surveyed by Bloomberg before the Labor Department’s nonfarm payrolls report tomorrow.
The Fed said January 29 it would further trim its monthly bond purchases to $65 billion starting in February from $75 billion in January, based on optimism that economic growth is improving.
Investors such as pension funds have boosted bets that developing-country currencies will depreciate — known as short positions — by less than half that of leveraged funds in the past week, according to a February 3 report of client flow data from Citigroup Inc., the second largest foreign-exchange trader behind Deutsche Bank AG.
Near ‘Bottom’
That’s in part because longer-term investors, known as real money, had already shifted some holdings into currencies of countries that aren’t as reliant on the Fed’s cheaper dollar funding, said Richard Cochinos, the head of Americas G-10 currency strategy at Citigroup in New York. Their leveraged counterparts such as hedge funds have accounted for about 75 percent of emerging-market selling, he said.
“The dominant emerging-market foreign-exchange selling has been from hedge funds,” Cochinos said January 23. For investors with more than a one-month horizon, “we are 80 percent near the bottom,” he said.
Investors have pulled cash out stock and bond funds, driving the MSCI emerging markets gauge to drop 6.6 percent in January, extending its worst start since 2009, while a JPMorgan Chase & Co. gauge of local-currency debt lost 2.7 percent last month.
“What we are seeing right now is a lot of money exiting the emerging markets,” UBS AG Chief Executive Officer Sergio Ermotti, the head of Switzerland’s biggest bank, said February 4 in Zurich on Bloomberg Television’s “Countdown.” “Short term, it looks a little bit overdone.”
The material has been provided by InstaForex Company – www.instaforex.com
Traders who expected a year when riskier bets would pay off are overhauling their foreign-exchange positions after an emerging markets rout led to the largest currency-fund declines to open the year since 2004.
Hedge funds and other huge speculators shuffled holdings of the dollar, yen, pound, Mexican peso and four other major currencies by a net 102,115 contracts in the week ended January 28, according to Commodity Futures Trading Commission data. That’s the largest realignment since September, with updated figures due tomorrow. Currencies from the U.K., Japan and Europe saw the largest surge in bets on appreciation, while traders added wagers on pullbacks for Mexico’s and Australia’s currencies.
With the global economy gathering steam, foreign-exchange traders were positioned to take advantage from hikes in riskier assets, even with the Federal Reserve pledging to purchase fewer bonds. They failed to foresee turmoil in emerging markets from China to Argentina that followed a slowdown in U.S. jobs growth as the yen — a favored haven – advanced versus all 31 of its major counterparts this year.
“There’s been a vast re-pricing of risk,” Carl Forcheski, a director in corporate currency sales at Societe Generale SA in New York, said February 5 in a phone interview. “When these dams sometime break, then you have little bit of a move that feeds on itself.”
Currency Funds
The Parker Global Currency Managers Index fell 1.4 percent last month among the 34 funds that reported results to Stamford, Connecticut-based Parker Global Strategies LLC. It was the largest monthly drop since August.
Colombia’s peso led selling by Credit Agricole Group clients of non-Group of 10 currencies in the week ended February 2, according to a February 3 report by the French bank. All transactions in the currency were sales, while 95 percent of Israeli shekel transaction volume was sales. Credit Agricole’s customers increased holdings of Taiwan’s and Hong Kong’s dollars, Brazil’s real and Mexico’s peso.
“What I’m most concerned about is whether the institutional investors, big pension-fund and mutual-fund guys, that they’re also beginning to capitulate, or at least reduce some of the bets that they put on in late 2013,” Adam Myers, European head of foreign-exchange strategy at Credit Agricole SA’s corporate and investment banking unit in London, said February 3 in a telephone interview. “Risk-sensitive currencies will underperform and traditional safe-haven will outperform as long as this capitulation continues.”
Credit Agricole is the world’s fifth-largest bank by assets, according to the company’s website.
China’s Role
SocGen’s Forcheski said the February 3 report showing a Chinese manufacturing gauge fell to a six-month low in January was a trigger for emerging-market currency selling.
China buys everything from Chile’s copper to South Korea’s cars. To cope with the fallout, Turkey and South Africa sought to stem a run on their currencies by raising interest rates and Argentina has experimented with capital controls.
The lira has trimmed its decline this year to 4 percent versus the dollar, after dropping as much as 11.3 percent in January. South Africa’s rand has pared its decline to 5.7 percent in 2014, after falling as much as 8.6 percent last month.
Growth Projections
“The pace of the selloff is likely to diminish,” Ilan Solot, a strategist at Brown Brothers Harriman & Co. in London, said February 4 in a phone interview. “Not to say that it’s all over and we’re going to rally, but the speed of the selloff we’ve seen in the last month or so, I think that’s over.”
The International Monetary Fund raised its global growth projection to 3.7 percent from an October estimate of 3.6 percent on accelerations in the U.S. and U.K. The average projection for 2014 U.S. gross domestic product growth is 2.8 percent, up from 2.6 percent at the start of the year.
Going into 2014, a bet on Mexico’s peso rallying against the yen was a top Bank of America Corp. trade for the year. Danske Bank A/S exited a trade last month buying lira versus Denmark’s krone at a loss of 2.9 percent.
Speculators were net long 22,530 futures positions in bets that the Mexico’s peso would rally against the greenback as of December 13, according to CFTC data. Investors have reversed those positions, holding a net 35,316 contacts betting on a peso decline on January 28.
Payrolls Surges
U.S. payrolls in December increased at the slowest pace since January 2011, a Labor Department report showed January 10, indicating a pause in the recent strength of the U.S. labor market that may partly reflect the effects of bad weather. The U.S. added 184,000 jobs in January, according to economists surveyed by Bloomberg before the Labor Department’s nonfarm payrolls report tomorrow.
The Fed said January 29 it would further trim its monthly bond purchases to $65 billion starting in February from $75 billion in January, based on optimism that economic growth is improving.
Investors such as pension funds have boosted bets that developing-country currencies will depreciate — known as short positions — by less than half that of leveraged funds in the past week, according to a February 3 report of client flow data from Citigroup Inc., the second largest foreign-exchange trader behind Deutsche Bank AG.
Near ‘Bottom’
That’s in part because longer-term investors, known as real money, had already shifted some holdings into currencies of countries that aren’t as reliant on the Fed’s cheaper dollar funding, said Richard Cochinos, the head of Americas G-10 currency strategy at Citigroup in New York. Their leveraged counterparts such as hedge funds have accounted for about 75 percent of emerging-market selling, he said.
“The dominant emerging-market foreign-exchange selling has been from hedge funds,” Cochinos said January 23. For investors with more than a one-month horizon, “we are 80 percent near the bottom,” he said.
Investors have pulled cash out stock and bond funds, driving the MSCI emerging markets gauge to drop 6.6 percent in January, extending its worst start since 2009, while a JPMorgan Chase & Co. gauge of local-currency debt lost 2.7 percent last month.
“What we are seeing right now is a lot of money exiting the emerging markets,” UBS AG Chief Executive Officer Sergio Ermotti, the head of Switzerland’s biggest bank, said February 4 in Zurich on Bloomberg Television’s “Countdown.” “Short term, it looks a little bit overdone.”
The material has been provided by InstaForex Company – www.instaforex.com
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