While the central bank heavies are busy knocking seven bells out of each other’s economies, one level down there is a flurry of activity as fund managers seek to eke that extra bit of return by playing the currency fluctuations.
Foreign exchange trading is often just the dusting on the fund manager’s cake, but in a world of zero interest rates and higher cash weightings, multi-asset specialists have recently been wading a bit deeper into currency markets.
‘Currencies are an important tool in our portfolios,’ said Gavin Counsell, senior manager in Aviva Investors’ multi-asset team. ‘We use them in two ways: as a return enhancement; and as a risk-reducing idea.’
It is along the former slant that managers have found fortune in recent months. The 2015 theme of long dollar plays against the majority of global currencies – prompted by central bank policy divergence – has given way to a new dynamic.
‘Central banks have recently become aware of how foreign exchange feeds into global financial conditions and they are responding to that,’ said Geraldine Sundstrom, manager of the Pimco GIS Global Multi-Asset fund.
‘Around March it became clear that the European Central Bank and Bank of Japan were going to be less aggressive in using negative interest rates and China would be doing everything it could to keep the renminbi stable versus that basket.’
Beggar thy neighbour
Having reaped the relatively straight-forward rewards of the dollar steamrolling its contemporaries – with the exception of the Indian rupee – Counsell is now playing the volatility that has recently been sweeping the markets.
‘One week the Fed sounds dovish, the next it sounds hawkish,’ he said. ‘Those mixed messages are causing uncertainty.
‘At present, approximately 20% of our total risk is being driven by FX. Over the last year, we have trimmed our US dollar theme and we have sought to take advantage of currency volatility positions in conjunction with directional currency positions.’
Counsell highlights a short yen position versus the dollar as a good example of a volatility play, having switched from a directional position in mid-May.
Sundstrom has also been prising returns from the unrest, but, contrary to Counsell, she believes the worst of the storm has passed and has subsequently manoeuvred her currency exposure from range trading to a more directional stance.
She said: ‘We have been prudently introducing higher-yielding and higher-carrying currencies in emerging markets This is in light of China and the US’s implicit understanding that the Fed cannot be too hawkish so China can keep the renminbi relatively stable.
‘The corollary is that we expect much less volatility between the major currencies, and having had much larger positions, we are now more neutral.’
Sundstrom says the door is now open for emerging market currencies that saw their value haemorrhaged by the commodities plunge — particularly the Russian rouble and Brazilian real — to make a comeback.
‘The yield on the real is 10-12% and the rouble 8-9%, depending on where you catch the fall,’ she said. ‘This is very interesting yield in a zero interest rate world. Part of it is capital appreciation, but a large part of expected return comes from the carry of the yield those currencies have.’
At the end of March, cash accounted for 9.61% of her fund’s net assets.
One play on which Sundstrom and Counsell share a positive view is holding the Indian rupee long versus the dollar — a position Counsell has been in for some time.
‘We still have a long Indian rupee position versus the dollar, which we like for fundamental reasons,’ Counsell explained.
‘The direction of travel is good and is a longer-term trend; we typically look to have our trades on a two- to three-year time horizon, and there are a number of supportive factors for that.’
While Sundstrom concedes that the current patch of relative global serenity may just be the eye of the hurricane, in the long term she is confident that FX choppiness will subside.
‘There are a few hurdles on the horizon, most imminently the EU referendum,’ she said. ‘We might do some short-term risk reduction in our portfolio, but it will not change our overall sentimental view.
‘As long as the Fed maintains a dovish stance, and China and commodity prices are relatively stable – the trade should hold.’