Fund Managers Turn to Tactical Shorts, Yuan as Dollar Stalls (1)

(Bloomberg) -- Short the dollar on any bounce. Bet on a recovery of the euro after the French elections. Position for the yuan to strengthen.

These are some of the strategies fund managers such as AMP Capital Investors Ltd. and Amundi SA are adopting as the dollar becomes rangebound amid concern President Donald Trump will fail to enact his reflation policies.

Others include:

• Buy Australia’s dollar against New Zealand’s

• Take a long position in the yen

• Short the Canadian dollar

• Buy unhedged Malaysian equities
  

Nader Naeimi at AMP Capital said he held off buying dollars last week even as the currency slumped as Trump’s unsuccessful health-care deal rattled faith in his pro-growth agenda. He’s waiting for the greenback to recover, but only to add to wagers that would profit from a subsequent decline.

“The dollar’s weakness has been broad-based,” said Sydney-based Naeimi, who heads a dynamic investment fund at AMP Capital, which oversees $120 billion. “But instead of buying the dollar here, I’d use a bounce as an opportunity to add to shorts.”

After surging in the last three months of 2016, the U.S. currency gave up about half those gains in the first quarter of this year as investors grew tired of waiting for details of Trump’s fiscal-stimulus program. Even a Federal Reserve interest-rate increase in March and the prospect of further tightening failed to reinvigorate the greenback.

The Bloomberg Dollar Spot Index fell to a four-month low last week on concern Trump will struggle to steer his promised tax cuts through Congress after failing to overturn former President Barack Obama’s health-care plan. Declines were halted as the gauge bounced off its 200-day moving average.

Hedge funds and other large speculators turned net sellers on the dollar for the first time in four weeks in the period ended March 28, according to the latest data from the Commodity Futures Trading Commission in Washington.

The greenback will find it difficult to regain momentum as the global divergence trade that contrasted strengthening U.S. growth with weaker economies elsewhere appears to be over, according to Amundi, Europe’s largest asset manager.

“As the market has shifted from U.S. reflation to global reflation and from divergence in policy to convergence, the dollar will find it difficult to outperform,” said James Kwok, the London-based head of currency management at Amundi, which oversees more than $1 trillion.

Investors are betting the European Central Bank will start raising borrowing costs before it ends quantitative easing, while most economists see the Bank of Japan as finished with adding stimulus under Governor Haruhiko Kuroda.

‘Buying Opportunity’

Not everyone sees the dollar staying trapped in a range.

Hedge-fund manager Tony Bradley said he remains optimistic on U.S. economic growth and is bullish on the greenback, predicting it will strengthen to 120 yen and advance beyond parity with the euro.

“In the medium term, this is a buying opportunity for dollars,” said Bradley, a partner at Hunter Burton Capital in Sydney. “But the market is trading more politically than economically at the moment.”

The dollar was at 111.34 yen as of 11:45 a.m. in Tokyo on Monday, after staying largely between 110 and 115 during February and March. The greenback was at $1.0680 per euro after failing to sustain itself beyond $1.05 in the same period.

The money managers’ other positions include:

• AMP Capital’s Naeimi

  • Plans to add dollar shorts against euro, pound, Aussie

  • Will take advantage of any bounce in U.S. dollar to sell it against the currencies of Singapore, Taiwan and South Korea, and buy unhedged Malaysian equities

  • Aims to buy the dollar if it falls to around 108 yen, and sell near 115

  • Plans to buy AUD/NZD on any weakness

  • “Big surprise of 2017 will be yuan strength” given consensus for a weaker currency; sees yuan appreciating to 6.6 per dollar by year-end

• Amundi’s Kwok

  • Holds a long yen position and is short the Canadian dollar

  • Owns downside protection on euro via options

  • Sees euro as set to recover once the French presidential election is over; while Italy’s political angst and the prospect of more U.S. rate increases in 2017 will be hurdles, the ECB is preparing to withdraw stimulus

  • Biggest risk for the market this year is uncertainty over when the Fed will begin to reduce its balance sheet

• Hunter Burton Capital’s Bradley

  • Plans to sell AUD/USD if it climbs toward 0.7750 to 0.7850

  • Pair set to drop to 0.65

  • “The market is actually quite complacent about the Australian dollar”

  • If the RBA refrains from raising rates in the next 12 months while the Fed tightens another couple of times, the Australian dollar will come under a lot of pressure

(Adds data on dollar bets by speculators in eighth paragraph.)

To contact the reporter on this story: Netty Ismail in Singapore at nismail3@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds, Shikhar Balwani

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