Hedge Funds Rework Currency Positions In Market Drop
Traders who anticipated a year when riskier bets would pay off are overhauling their foreign-exchange positions after an emerging-markets rout led to the worst start to the year for currency funds since 2004.
Hedge funds and other large 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 Jan. 28, according to Commodity Futures Trading Commission data. That's the biggest realignment since September, with updated figures due today. Currencies from the U.K., Japan and Europe saw the biggest increase in bets on appreciation, while traders added wagers on declines for Mexico's and Australia's currencies.
With the global economy gathering steam, foreign-exchange traders were positioned to benefit from gains in riskier assets, even with the Federal Reserve pledging to buy 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—rallied against all 31 of its major peers 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 Wednesday in a phone interview. "When these dams sometime break, then you have little bit of a move that feeds on itself."
The Parker Global Currency Managers Index fell 1.4 percent last month among the 34 funds that reported results to Stamford, Conn.-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 Feb. 2, according to a Feb. 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 Feb. 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.
SocGen's Forcheski said the Feb. 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.