Q3 was tough for most investors, but not macro funds long USD. HFR’s Currency Index jumped a record 6.09 percent in the quarter and is up 12.83 percent this year (also a record). Reuters columnist Jamie McGeever explores further.
- “Buy dollars, wear diamonds,” goes the old foreign exchange market saying. It also encapsulates macro hedge funds’ trading strategy today – while most investors got smoked in the third quarter as stocks, bonds and commodities slumped, macro funds raked it in thanks to the surging U.S. dollar.
- Speculators are riding the crest of the greenback’s most bullish wave in over half a century.
- There is little indication the wave is about to crash any time soon, and although hedge funds have reduced their exposure in recent weeks, they remain comfortably long.
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The opinions expressed here are those of the author, a columnist for Reuters.
Figures from hedge fund industry data provider HFR show that its Currency Index jumped 6.09 percent in the July-September period, the biggest quarterly gain since the index was launched in 2008.
The index – a key component of the broader Macro Index, which is also booming – is up 12.83 percent this year. It is well on course to chalk up its biggest annual rise, beating the previous best of 6.3 percent from 2010.
The dollar’s rally this year has been relentless. Many currencies have slumped to historic or record lows, and a large and growing number of central banks have intervened to prevent the routs from getting even worse.
The tremors have not been confined to less liquid emerging market currencies. The Bank of Japan sold dollars for the first time since 1998, the Swiss National Bank ended a seven-year era of FX purchases to curb the franc’s gains, and in late September sterling plunged 10 percent in a few days to a record low below $1.04.
This would normally mean the risk of a significant pullback is growing. But the Fed seems determined to continue raising rates aggressively – a conviction matched by few other central banks, if any – so demand for dollars remains solid.
“The Fed’s hawkish stance will remain supportive of the dollar for some time yet,” Jonathan Peterson of Capital Economics wrote.
Long, long, long
The dollar index, a measure of the greenback’s value against a basket of six major currencies, rose 7.1 percent in the third quarter, its best performance since early 2015. It was its fifth successive quarterly rise, the longest upswing since 1997-98.
The index is up 17.5 percent this year. A close at this level on 31 December would seal its biggest annual rise since the era of free-floating exchange rates was introduced over 50 years ago.
America’s currency, the world’s problem.
The latest Commodity Futures Trading Commission’s figures show that speculators trimmed their net long dollar position in the week ending 4 October to the lowest since March.
But CFTC hedge funds have held a net long dollar position every week since August last year, and a $10 billion bet is still a pretty resounding endorsement of the U.S. currency over its major rivals.
Compare the performance of HFR’s Currency and Macro Indexes – both at record highs and up 12.83 percent and 10.91 percent so far this year, respectively – with major stocks and bonds markets, and even the broader hedge fund industry itself.
The benchmark S&P 500 index is down 23.6 percent this year, the MSCI World Equity Index is down 25.5 percent, and Bank of America’s benchmark U.S. Treasury index is down 13.8 percent. HFR’s weighted Composite Index of hedge fund strategies is down 6.18 percent.
With numbers like these, it looks like funds may be buying dollars and wearing diamonds for a good while yet.