THIS YEAR’S most profitable foreign-exchange trade is signalling increased optimism that the first global recession since the second World War is easing.
Bets that currency swings will continue falling from record highs produced profits in each of the past five months for a 32 per cent gain, the best performance for that length of time, according to ABN Amro indices. The strategy was the only one of four currency tactics simulated by ABN that made money in the first quarter.
Currency fluctuations ebbed as global economies recovered from the turmoil that followed Russia’s 1998 default and the September 11th terrorist strikes in 2001.
Now, the JPMorgan Chase benchmark index of investor expectations for currency swings, known as implied volatility, has fallen to 14.4 per cent from its 27 per cent October record. The G7 Volatility Index’s decline since mid-January is the steepest three-month drop since its 1992 inception.
“Big currency moves are behind us,” said Maxime Tessier, chief of foreign exchange at Montreal-based Caisse de Depot et Placement du Quebec, Canada’s biggest pension fund manager. “Selling volatility has been the winning trade so far this year and will continue to work well.”
That may be good news for the global economy. Within a week of the 9/11 attacks, the JPMorgan index jumped to 13 per cent from 11 per cent. By April 2002, that gauge of expectations for US dollar swings over the coming three months versus the yen, euro, pound, Swiss franc, Australian dollar and Canadian dollar had fallen to 8 per cent as the US recovered from a recession. After Russia defaulted on $40 billion of debt in August 1998 during the Asian financial crisis, the index surged to almost 19 per cent in October, from 10 per cent in May.
Today, investors are becoming more convinced that unprecedented sums pledged by the world’s major economies, including $12.8 trillion from the US, will stem the worst financial crisis since the Great Depression.
The US economy will grow 0.3 per cent in the third quarter, from a year earlier, according to the median forecast in a Bloomberg survey. It probably contracted 5 per cent in the first quarter and will shrink 2 per cent in the second, the survey shows. – (Bloomberg)
