Forex
How hedge funds view the fate of king dollar
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© Reuters. FILE PHOTO: U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration
By Nell Mackenzie and Carolina Mandl
LONDON/NEW YORK (Reuters) – After making hay when a summer bond rout propelled the U.S. dollar to 10-month highs, hedge funds are now pondering what lies ahead for the greenback.
The dollar, down 3.5% in November against a basket of other major currencies, is set for its worst monthly performance in a year as expectations of interest-rate cuts next year grow, toppling Treasury yields from multi-year highs.
Five funds shared their views on the fate of the dollar. This does not represent recommendations or trading positions, which some hedge funds cannot reveal for regulatory reasons.
1/ AQR CAPITAL MANAGEMENT
* Systematic asset manager
* Size: $95 billion assets under management (AUM)
* Founded in 1998
* Key trade: Long dollar, short Swiss franc
Managing director Jonathan Fader believes that an end to U.S. rate hikes does not necessarily imply dollar weakness.
Over the last 40 years, the dollar has tended to average steady or a bit stronger in the months following a final hike, says Fader, who is “constructive” on the currency.
“In particular, growth trends in the U.S. look notably stronger than in most other major economies around the world,” he said.
Fader believes the best way to capitalise on ongoing dollar strength would be to buy the greenback against currencies exposed to negative price trends, weaker economic fundamentals and dovish monetary policy, such as the Swiss franc.
The Swiss franc is up around 5% against the dollar so far this year.
2/ FLORIN COURT CAPITAL
* Diversified systematic asset manager
* Size: $1.8 billion AUM
* Founded in 2016
* Key trade: Long Latin American emerging markets currencies/short dollar
Doug Greenig, Florin Court’s chief investment and executive officer, reckons the dollar will slowly decline as geopolitical tensions disperse power to different parts of the world.
He expects the U.S. economy to slow sharply which, alongside falling inflation, will likely hurt the dollar against some emerging market currencies.
“The year-on-year reduction in the U.S. broad money supply is huge. It’s even bigger when you factor in the inflation-adjusted money supply,” said Greenig, adding this would make it “very hard” to sustain growth. “This is the punch draining out of the punch bowl.”
Greenig noted that because many emerging market countries raised rates earlier and more aggressively than advanced economies, bond yields in countries such as Brazil, Colombia, Hungary and Poland look attractive.
3/ NWI MANAGEMENT LP * Global macro hedge fund * Size: $2.2 billion AUM * Founded in 1999 * Key trade: short offshore Chinese Yuan against a trade-weighted CFETS (China Foreign Exchange Trade System) basket of currencies
Tara Hariharan, managing director of global macro research at NWI, said the hedge fund is structuring its currency bets to limit the effect of swings in the dollar, as the resilience of the U.S. economy has made it difficult to call a peak for the greenback.
One of the trades she recommends involves China. Hariharan said yuan depreciation risks loom as China’s capital outflows rise, multinationals repatriate more earnings and the economy slows further.
“The yuan may be seasonally supported by Chinese New Year-related demand until late January but then may turn lower,” she said.
NWI also does not rule out a forced weakening of the yuan to improve China’s export competitiveness.
4/ GARDE ASSET
* Brazilian hedge fund, with global macro strategy
* Size: $300 million AUM
* Founded in 2013
* Key trade: Long Mexican peso
Garde CEO Carlos Calabresi favours Mexico’s currency because interest rates have been at an historic high of 11.25% since March and its balance of payments is in good shape.
He also believes the country will receive huge foreign investment from so-called “nearshoring” as manufacturing capacity is moved closer to the U.S. market from, for example, Asia.
These trends are likely to lead to a strengthening of the Mexican peso, which is up roughly 13% against the dollar this year.
5/ CIBC ASSET MANAGEMENT
* Canadian asset manager, with an active currency strategy
* Size: $145 billion AUM
* Founded more than 50 years ago
* Key trade: Long Brazilian real
Michael Sager, CIBC Asset Management’s head of multi-asset and currency management, believes the Brazilian real is likely to strengthen in the short term given a double-digit benchmark interest rate, currently 12.25%, that attracts foreign capital.
The Brazilian real, trading at 4.8908 per dollar, is up roughly 8% so far this year against the dollar.
Inflation, at around 5%, is also under control, as the Brazilian central bank was one of the first monetary authorities to begin hiking rates, said Sager.
Additionally, Latin America’s largest economy has strong exports and low debt levels compared to other major economies.
“If you put all of those pieces together, to us this is what a strong fundamental country and currency should look like,” he said.
Forex
Major Russian lenders say yuan coffers empty, urge central bank action
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By Elena Fabrichnaya
MOSCOW (Reuters) – Major Russian banks have called on the central bank to take action to counter a yuan liquidity deficit, which has led to the rouble tumbling to its lowest level since April against the Chinese currency and driven yuan swap rates into triple digits.
The rouble fell by almost 5% against the yuan on Sept. 4 on the Moscow Stock Exchange (MOEX) after the finance ministry’s plans for forex interventions implied that the central bank’s daily yuan sales would plunge in the coming month to the equivalent of $200 million.
The central bank had been selling $7.3 billion worth of yuan per day during the past month. The plunge coincided with oil giant Rosneft’s 15 billion yuan bond placement, which also sapped liquidity from the market.
“We cannot lend in yuan because we have nothing to cover our foreign currency positions with,” said Sberbank CEO German Gref, stressing that the central bank needed to participate more actively in the market.
The yuan has become the most traded foreign currency on MOEX after Western sanctions halted exchange trade in dollars and euros, with many banks developing yuan-denominated products for their clients.
Yuan liquidity is mainly provided by the central bank through daily sales and one-day yuan swaps, as well as through currency sales by exporting companies.
Chinese banks in Russia, meanwhile, are avoiding currency trading for fear of secondary Western sanctions.
At the start of September, banks raised a record 35 billion yuan from the central bank through its one-day swaps.
“I think the central bank can do something. They hopefully understand the need to increase the liquidity offer through swaps,” said Andrei Kostin, CEO of second-largest lender VTB, stressing that exporters should sell more yuan as well.
The acute yuan shortage also follows months of delays in payments for trade with Russia by Chinese banks, which have grown wary of dealing with Russia after U.S. threats of secondary Western sanctions. These problems culminated in August in billions of yuan being stuck in limbo.
Russia and China have been discussing a joint system for bilateral payments, but no breakthrough is in sight. VTB’s Kostin said that since Russia’s trade with China was balanced, establishing a clearing mechanism for payments in national currencies should not be a problem.
Forex
Bank of America sees more downside for the dollar
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Investing,com – The US dollar has stabilized after a sharp fall in August, but Bank of America Securities sees more troubles ahead for the US currency.
At 07:20 ET (11:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.077, having largely held its course over the last week.
That said, the US currency is still down 1.6% over the month.
The dollar’s selloff last month stood out in a historical context, according to analysts at Bank of America Securities, in a note dated Sept. 5.
The greenback has since stabilized, however, despite the outsized weakness, the US bank still sees three reasons to stay bearish on the Dollar Index (DXY).
Following similar episodes of bearish DXY breakouts, the index has tended to continue its downtrend, the bank said.
In the last 3 analogs, DXY index fell on average for another 4% before reaching a bottom. Extending this analysis to bilateral USD/G10 pairs suggests a continuation of the USD downtrend is more likely vs EUR, GBP, and AUD than SEK, NOK, and CHF in G10.
While the DXY made a new year-to-date low in August, broad nominal and real USD trade-weighted indices have stayed at Q4 2022 levels and would suggest the USD remains overvalued.
The USD selloff in 2024 has been concentrated in and other European currencies, leading to DXY divergence from other USD indices.
The bank also noted US 10y Treasury yield’s tendency to fall after the first Federal Reserve cut, while global financial conditions are set to loosen further.
“USD may see more weakness as other central banks, particularly the ones that cut policy rates ahead of the Fed, can now afford to let the Fed do some of their work and indirectly support global economies outside of the US,” BoA added.
Forex
Dollar’s demise appears overstated – JPMorgan
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Investing.com – The US dollar has had a difficult summer, dropping substantially during the month of August, but JPMorgan thinks those predicting the demise of the U.S. currency are getting ahead of themselves.
At 06:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.127, having lost 1.6% over the course of the last month.
“Diversification away from the dollar is a growing trend,” said analysts at JPMorgan, in a note dated Sept. 4, “but we find that the factors that support dollar dominance remain well-entrenched and structural in nature.”
The dollar’s role in global finance and its economic and financial stability implications are supported by deep and liquid capital markets, rule of law and predictable legal systems, commitment to a free-floating regime, and smooth functioning of the financial system for USD liquidity and institutional transparency, the bank added.
Additionally, the genuine confidence of the private sector in the dollar as a store of value seems uncontested, and the dollar remains the most widely used currency across a variety of metrics.
That said, “we are witnessing greater diversification and important shifts in cross-border transactions as a result of sanctions against Russia, China’s efforts to bolster usage of the RMB, and geoeconomic fragmentation,” JPMorgan said.
The more important and underappreciated risk, the bank added, is the increased focus on payments autonomy and the desire to develop alternative financial systems and payments mechanisms that do not rely on the US dollar.
“De-dollarization risks appear exaggerated, but cross-border flows are dramatically transforming within trading blocs and commodity markets, along with a rise in alternative financial architecture for global payments,” JPMorgan said.
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