Go long the euro. Short the pound. Sell Brazil’s real, the Mexican peso and South Africa’s rand.
These are some of the strategies managers are adopting as they brace for Thursday’s trifecta of disruptions. AMP Capital Investors Ltd.’s Nader Naeimi sees former FBI Director James Comey’s testimony as the biggest wildcard. But he also thinks U.S. bond yields are close to their foundation and the dollar will gain alternative emerging-market currencies. Amundi SA, which supervise more than $1 trillion, is bullish on Europe.
Comey’s appearance before a Congressional panel about his investigation into Donald Trump campaign’s ties to Russia will come just hours after the European Central Bank’s meeting in the Estonian capital, Tallinn. Euro bulls are anxious for signal on whether policy makers will consider unrolling bond acquires. The pound faces its latest Brexit moment on the same day, as the U.K. holds a general election.
There’s more uncertainty brewing next week. The Federal Reserve is expected to raise interest rates June 14 and may offer guidance on both further increases and its thinking on when to start trimming its $4.5 trillion balance sheet. Treasuries have rallied this quarter, with 10-year yields dropping Tuesday to the lowest since November as traders lose confidence economic growth and inflation will accelerate.
“Comey’s testimony is likely to be the highlight,” said Naeimi, who heads a dynamic investment fund in Sydney at AMP Capital, which oversees $120 billion. “Looking at the market placing, investors have turned too defeatist on growth, so the Fed and ECB can lead to large bond-market vaporization.”
The decline in Treasury yields helped send the Bloomberg Dollar Spot Index to an eight-month low Tuesday. Investors have grown dubious of so-called reflation trades -- which drove up the currency and yields on optimism the Trump management would enact promises to improve spending. Washington has shown few signs of moving forward with tax and spending reforms.
“I have been of the view that the dollar has seen its peak, but no downtrend unfolds in a straight line,” Naeimi said. “The dollar is about to flex its muscle as bond yields bottom soon.”
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Amundi is bullish on European currencies. While there’s increased political uncertainty in Washington, the immediate risk in the euro area has subsided following Emmanuel Macron’s victory in the French election last month, according to Europe’s largest asset manager. Euro-area economic prospects have also improved, while U.S. data have disappointed.
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“There is an increasing divergence between the U.S. and euro zone in terms of political, economic, investment flow momentum,” said James Kwok, London-based head of currency management at Amundi. “While the bolster is expected to hike, the big attention will be more on how ECB will apparatus the exit scheme.”
Ninety percent of respondents in a Bloomberg survey said the ECB will use its meeting on Thursday to acknowledge the risks surrounding the euro area’s recovery are balanced. above that, the 60 analysts are split on whether the central bank will detach its easing bias on attentiveness rates, and the proportion expecting an declaration by September on the future of the bond-buying program has slain since the previous observe.
The euro has strengthened about 7 percent against the dollar in 2017 after dropping in each of the previous three years.
Keith Dack, a senior portfolio manager at Kit Trading Fund in Singapore, said he doesn’t hold any position in the greenback, preferring to “play the crosses.” The hedge-fund manager, who has more than 30 years of trading experience, is betting on gains in the euro and New Zealand dollar and declines in the pound and the Australian currency.
The money managers’ other positions include:
AMP Capital’s Naeimi
- Holds short positions in the Brazilian real, Mexican peso and South African rand against the dollar as he reduces his fund’s emerging-market holdings significantly in favor of Japanese shares
- U.S. bond yields have priced in most of the bad news
- “As bond yields and the dollar rise, EM equities are likely to underperform, while Japanese equities should benefit,” he said. “The currency market looks a perfect place to hedge equity exposure right now”
- The manager’s flow and sentiment indicators show emerging-market currencies have become crowded trades
- Impeachment proceedings “highly unlikely” with Republican leadership in the House and Senate even though Comey’s testimony might have a short-term impact Amundi’s Kwok
- Sees gains in euro, Sweden’s krona, Norway’s krone
- Pound will also strengthen if Prime Minister Theresa May’s Conservative Party achieves a majority in parliament
- “We expect a continued recovery of the European currencies, both in the near and medium term”
Kit Trading Fund’s Dack
- Has been holding long EUR/GBP position
- “That seems to be the best way to play the upcoming ECB meeting and U.K. elections,” he said. “The ECB is likely to change the wording to highlight the improvement in the European economy”
- Despite recent polls, May is likely to win with an increased majority in parliament, reshuffle the cabinet and pursue a harder Brexit
- Holds short GBP/NZD, AUD/NZD
