Business World

Thursday 8 December 2016

Currency speculators make it big in $5 trillion a day market

Susanne Barton

Published 30/08/2016 | 02:30

Photo: Bloomberg
Photo: Bloomberg

Everyone's a winner in the $5.3 trillion a day global currency market this year.

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For just the second time in the past decade, three major foreign-exchange trading strategies are all producing positive returns. The carry trade, in which investors borrow in Group of 10 currencies with low interest rates and use the proceeds to buy assets with higher yields, is on pace for its biggest annual gain since 2012, according to Deutsche Bank AG index data.

Trades that buy undervalued currencies and sell expensive ones, and tactics that latch onto foreign-exchange trends, are also making money.

Choosing the correct foreign-exchange strategy has become even more important in a world of unprecedented central-bank monetary stimulus and currencies linked to historically low interest rates.

Investors are recalculating their approaches after Federal Reserve Chair Janet Yellen's Jackson Hole speech boosted the likelihood for higher US rates while monetary policy makers in Europe and Asia add stimulus.

"Central-bank policy is always going to be the number-one driver of our strategy," said James Ong, an Atlanta-based senior macro strategist at Invesco. "The ability to acknowledge the valuation and policy dynamics in Japan was the number-one thing that helped us. Diversifying some of our trades away from being dollar trades also helped as well."

While emerging market based carry trades stumbled this month, the Deutsche Bank measure, which focuses on more widely traded G-10 currencies, has returned 5.8pc this year, a stark reversal from last year's 7.7pc decline. Investors have piled into Australian and New Zealand dollars, lured by yields that even near record lows still pay a premium over bonds from Japan, Europe and the US. Their rallies, a boon for carry-trade investors, fly in the face of Antipodean central bankers who continue to cut rates in a bid to boost inflation. (Bloomberg)

Irish Independent

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