Forex
How hedge funds view the fate of king dollar
© 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.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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