2023-11-30 05:00:00
After taking advantage of the bond rout during the summer to propel the US dollar to its highest level in ten months, hedge funds are now wondering regarding the future of the greenback.
The dollar, which lost 3.5% in November once morest a basket of other major currencies, is poised for its worst monthly performance in a year, amid expectations of interest rate cuts for next year rise, sending Treasury yields down from their multi-year highs.
Five funds shared their views on the fate of the dollar. These are not recommendations or trading positions, which some hedge funds cannot reveal for regulatory reasons.
1/ AQR CAPITAL MANAGEMENT
* Systematic asset manager
* Size: $95 billion in assets under management (AUM)
* Founded in 1998
* Main operations: Long dollar, short Swiss franc
Chief Executive Jonathan Fader believes the end of U.S. rate hikes does not necessarily mean dollar weakness.
Over the past 40 years, the dollar has tended to stabilize or strengthen slightly in the months following the last rise, says Fader, who is “constructive” on the currency.
“In particular, growth trends in the United States appear significantly stronger than in most other major economies around the world,” he said.
Fader believes the best way to take advantage of the dollar’s current strength would be to buy the greenback once morest currencies exposed to negative price trends, weaker economic fundamentals and dovish monetary policy, such as Swiss franc.
The Swiss franc is up regarding 5% once morest the dollar since the start of the year.
2/ FLORIN COURT CAPITAL
* Diversified systematic asset manager
* Size: $1.8 billion in assets under management
* Founded in 2016
* Main operations: Long currencies of emerging Latin American markets / short dollars.
Doug Greenig, chief investment and management officer at Florin Court, believes the dollar will slowly decline as geopolitical tensions ripple across different regions of the world.
He expects a sharp slowdown in the American economy which, combined with a fall in inflation, should penalize the dollar once morest certain emerging market currencies.
“The year-over-year reduction in the broad money supply in the United States is enormous. It is even larger when you take into account the inflation-adjusted money supply,” Mr. Greenig, adding that it would then be “very difficult” to sustain growth. “It’s the punch that flows out of the punch bowl.
Mr. Greenig noted that as many emerging markets raised rates earlier and more aggressively than advanced economies, bond yields in countries such as Brazil, Colombia, Hungary and Poland seem attractive.
3/ NWI MANAGEMENT LP
* Global macro hedge fund
* Size: $2.2 billion in assets under management
* Founded in 1999
* Main activity: short selling of offshore Chinese yuan once morest a basket of currencies weighted by the CFETS (China Foreign Exchange Trade System).
Tara Hariharan, managing director of global macroeconomic research at NWI, said the hedge fund was structuring its currency bets to limit the effect of dollar fluctuations as the resilience of the US economy had made it difficult to determine ‘a peak for the greenback.
One of the operations she recommends concerns China. Hariharan said risks of yuan depreciation loom as capital outflows increase, multinationals repatriate more profits and the economy slows further.
“The yuan might be seasonally supported by Chinese New Year-related demand until the end of January, but then it might fall back,” she said.
NWI also does not rule out a forced weakening of the yuan to improve the competitiveness of Chinese exports.
4/ GARDE ASSET
* Brazilian hedge fund, with a global macro strategy.
* Size: $300 million in assets under management
* Founded in 2013
*Key trade: Mexican long peso
Carlos Calabresi, CEO of Garde, favors the Mexican currency because interest rates are at a historic high of 11.25% since March and the balance of payments is in good shape.
He also believes that the country will receive huge foreign investments through so-called “nearshoring”, i.e. the relocation of production capacity to the American market from Asia, For example.
These trends are expected to lead to a strengthening of the Mexican peso, which has risen regarding 13% once morest the dollar this year.
5/ CIBC ASSET MANAGEMENT
* Canadian asset manager, with an active currency strategy.
* Size: $145 billion in assets under management
* Founded over 50 years ago
*Key trade: Long Brazilian Real
Michael Sager, head of multi-asset and currency management at CIBC Asset Management, believes the Brazilian real is likely to strengthen in the near term due to a double-digit benchmark interest rate, currently at 12.25%, which attracts foreign capital.
The Brazilian real, which trades at 4.8908 to the dollar, is up regarding 8% year to date once morest the dollar.
Inflation, which is around 5%, is also under control, with Brazil’s central bank being one of the first monetary authorities to start raising rates, Mr. Sager said.
Additionally, Latin America’s largest economy has significant exports and low debt levels compared to other major economies.
“If you put all these things together, we think this is a fundamentally strong country and currency,” he said.
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