Traders Enjoy Best Year Since 2008 as Swings Return: Currencies

By Lukanyo Mnyanda

Currency traders will be starting 2015 on their hottest winning streak in a decade.
An index of foreign-exchange returns has risen for the past six months, the longest stretch since 2005 and turning this year into the best since 2008. That marks a comeback for traders who, as recently as September, were facing a fourth year of losses as record-low volatility limited opportunities to make money.
The catalyst for change came with a divergence in monetary policy, helping the dollar burst higher while pressuring currencies such as the euro, Norwegian krone and Australian dollar. First, European Central Bank President Mario Draghi said the central bank was ready to
act to counter slower inflation. Next, the Bank of Japan expanded the supply of yen via its quantitative-easing program. Now, Federal Reserve Chair Janet Yellen is preparing to raise interest rates next year.
“The second half of the year has been much more encouraging for us from a perspective of generating returns from currency,” said Gordon Ibrahim, a money manager at BlackRock Inc. in London. “We are always cautious about whether this is sustainable but we are more optimistic. We have been increasing our risk allocation to currency within a number of our funds.”

Jackson Hole

Prior to Draghi’s Aug. 22 remarks during a speech at the Fed Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyoming, the Parker Global Strategies LLC index that tracks the performance of 14 top currency funds had fallen 2.7 percent from Dec. 31. It has since climbed more than 5 percent, set for a 2.6 percent annual increase.
The measure had fallen in 2011, 2012 and again in 2013, losing a combined 8 percent in those years.
This quarter, the ruble is the worst performer against the dollar among the 31 major currencies tracked by Bloomberg, dropping 32 percent, followed by the Colombian peso’s 15 percent decline and the krone’s 13 percent plunge. Only the New Zealand and Hong Kong dollars have strengthened.
The Parker gauge’s performance in the first half coincided with a drop in price swings that pushed the JPMorgan Global FX Volatility Index to a record low 5.29 percent on July 3 based on closing prices. The JPMorgan index was at 9.98 percent today, and Europe’s common currency is more than 8 percent weaker since Draghi’s speech, set for its first annual decline since 2011. It declined to a two-year low of $1.2124 yesterday, and was at $1.2146 today.

Gaining Momentum

Fluctuations may increase with policy makers in Frankfurt studying additional stimulus measures. Japan’s monetary policy will also be under scrutiny with strategists surveyed by Bloomberg predicting the yen will weaken in 2015.
The divergence in monetary policy that has boosted returns in the foreign-exchange market is set to continue, according to Jane Foley, a senior strategist at Rabobank International.
At the conclusion of the Fed’s meeting on Dec. 17, Yellen said officials were on course to raise the overnight target rate from close to zero and suggested a “patient” approach may translate into an increase by the middle of 2015. U.S. gross domestic product expanded at a 5 percent annual rate in the third quarter, the most since the same period in 2003, revised government data released last week showed.
“It’s fairly normal to have a heightened amount of volatility at the turn of an interest-rate cycle,” Foley said in an interview from London on Dec. 22. “Certainly for investors there can be opportunities in volatility. The people who are going to find it more difficult are those who have to set pricing policy, people who have to hedge, even policy makers and central banks.”

Lull Over

Away from the largest currencies, geopolitical tensions and a collapse in commodity prices helped trigger the greatest moves in foreign-exchange markets this year.
The lull in volatility also ended as a conflict between Russia and Ukraine escalated and crude oil tumbled to the lowest since 2009. The ruble slid more than 40 percent against the dollar and the krone dropped 18 percent.
“Volatility is here to stay and that will present opportunities for currency investors,” Paresh Upadhyaya, Boston-based director of currency strategy at Pioneer Investment Management Inc., said in a telephone interview on Dec. 23. “It will make it a little trickier to use some of these currencies as funding currencies because with that volatility you can’t rest too easy for the whole year long.”
Upadhyaya, whose company oversees about $250 billion, was referring to carry trades, in which traders attempt to profit by exploiting differences in interest rates.
“You have to be a bit more tactical and strategic as to when to put on carry-trade opportunities,” he said.