Hedge Funds Rework Currency Positions In Market Drop

Bloomberg

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Wall St and Broad St street sign in NYC
Wall St and Broad St street sign in NYC

The lira has trimmed its decline this year to 3.4 percent versus the dollar, after dropping as much as 11.3 percent in January. South Africa's rand has pared its decline to 5.8 percent in 2014, after falling as much as 8.6 percent last month.

"The pace of the selloff is likely to diminish," Ilan Solot, a strategist at Brown Brothers Harriman & Co. in London, said Tuesday in a phone interview. "Not to say that it's all over and we're going to rally, but the speed of the selloff we've seen in the last month or so, I think that's over."

The International Monetary Fund raised its global growth projection to 3.7 percent from an October estimate of 3.6 percent on accelerations in the U.S. and U.K. The average projection for 2014 U.S. gross domestic product growth is 2.8 percent, up from 2.6 percent at the start of the year.

Going into 2014, a bet on Mexico's peso rallying against the yen was a top Bank of America Corp. trade for the year. Danske Bank A/S exited a trade last month buying lira versus Denmark's krone at a loss of 2.9 percent.

Speculators were net long 22,530 futures positions in bets that the Mexico's peso would rally against the greenback as of Dec. 13, according to CFTC data. Investors have reversed those positions, holding a net 35,316 contacts betting on a peso decline on Jan. 28.

U.S. payrolls in December increased at the slowest pace since January 2011, a Labor Department report showed Jan. 10, indicating a pause in the recent strength of the U.S. labor market that may partly reflect the effects of bad weather.

The Fed said Jan. 29 it would further trim its monthly bond purchases to $65 billion starting in February from $75 billion in January, based on optimism that economic growth is improving.

Investors such as pension funds have boosted bets that developing-country currencies will depreciate -- known as short positions -- by less than half that of leveraged funds in the past week, according to a Feb. 3 report of client flow data from Citigroup Inc., the second biggest foreign-exchange trader behind Deutsche Bank AG.

Near 'Bottom'

That's in part because longer-term investors, known as real money, had already shifted some holdings into currencies of countries that aren't as reliant on the Fed's cheaper dollar funding, said Richard Cochinos, the head of Americas G-10 currency strategy at Citigroup in New York. Their leveraged counterparts such as hedge funds have accounted for about 75 percent of emerging-market selling, he said.

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