INVESTOR PERSPECTIVES
:KDW VKRXOG WKH FRUUHODWLRQ EHWZHHQ 86 (TXLWLHV DQG 86
7UHDVXULHV EH" The answer is “zero”3
EXW ORRNLQJ MXVW D OLWWOH ELW
deeper into WKH TXHVWLRQ OHWV XV UHÀQH WKDW ÀUVW DQVZHU WR ´LW YDULHVµ $QG LW·V LQ WKDW YDULDWLRQ WKDW ZH EHJLQ WR VHH WKH %HWDV LQVLGH 86 (TXLWLHV 7KH EDVLF LGHD LV WKDW ZKHQ WKH :RUOG DQG 0DUNHWV DUH TXLHW DQG FDOP WKH ´(FRQRPLF *URZWKµ EHWD GRPLQDWHV
+RZHYHU ZKHQ WKH :RUOG DQG 0DUNHWV DUHQ·W TXLHW WKH ´5LVN\ $VVHWµ EHWD GRPLQDWHV 6R LQ D TXLHW :RUOG WKH FRUUHODWLRQ VKRXOG EH SRVLWLYH VLQFH ULVLQJ \LHOGV DUH EDG IRU FRPSDQ\ SURÀWV DQG KHQFH HTXLW\ UHWXUQV ZKHUHDV LQ D QRLV\ :RUOG WKH FRUUHODWLRQ VKRXOG EH QHJDWLYH VLQFH LI \RX·UH ZRUULHG \RX VHOO 5LVN\ $VVHWV4
DQG EX\ 6DIH $VVHWV5
*LYHQ WKDW GHÀQLWLRQ RI %HWD DQG RXU RQH H[DPSOH can we draw aQ\ FRQFOXVLRQV DERXW ); %HWD V "
,V ´6W\OHµ WKH VDPH DV ´%HWDµ" 6LQFH D %HWD LV HDUQLQJ D UHWXUQ IURP EHDULQJ D QRQ GLYHUVLÀDEOH rLVN FDQ D ´6W\OHµ EH D %HWD" 7KH GHEDWH LV IXQFWLRQDOO\ WKH VDPH DV DVNLQJ LI ´9DOXHµ DV D VW\OH RI HTXLW\ LQYHVWLQJ UHSUHVHQWV D %HWD RU QRW" 1RWH WKDW ´6W\OHµ KHUH LV HIIHFWLYHO\ ´1DwYH 6WUDWHJ\µ LQ PHDQLQJ
)RUWXQDWHO\ LQ WKH ODVW GHFDGH D ERG\ RI ZRUN ERWK DFDGHPLF DQG SUDFWLWLRQHU KDV EHHQ SURGXFHG RQ WKLV YHU\ WRSLF
2QH RI WKH HDUOLHVW EURDG VXPPDULHV LV D SDSHU SXEOLVKHG LQ
6 WKDW ORRNV DW FXUUHQF\ ´VW\OHVµ
H[SOLFLWO\ )RXU VXFK VW\OHV ZHUH LGHQWLÀHG LQ WKDW SDSHU 9DOXH 7UHQG )ROORZLQJ <LHOG DQG 9RODWLOLW\ &DSWXUH 7KH VSHFLÀFV RI HDFK RI WKRVH ´VW\OHVµ DUH GHÀQHG LQ WKDW SDSHU WR D GHWDLOHG HQRXJK H[WHQW WKDW DQ LQWHUHVWHG UHDGHU ZLWK DFFHVV WR WKH GDWD FRXOG recreate the returns at their leisure7
7KHUH LV RQH SUREOHP ZH·G SRLQW RXW WKRXJK 7KH GHÀQLWLRQV RI WKRVH ´6W\OHVµ DUH YHU\ LGLRV\QFUDWLF )RU H[DPSOH DOPRVW HYHU\RQH ZKR WUDGHV FXUUHQF\ KDV KHDUG RI WKH ´&DUU\ 7UDGHµ 8
%XW ZKDW H[DFWO\ LV LW"
3HUKDSV WKH PRVWO\ FRPPRQO\ XVHG GHÀQLWLRQ RI LW LV ´JR ORQJ WKH KLJK \LHOG FXUUHQFLHV DQG JR VKRUW WKH ORZ \LHOG FXUUHQFLHV µ 7KH SUREOHP LV WKDW GHÀQLWLRQ GRHVQ·W WHOO XV KRZ ORQJ VKRUW WR JR ZKLFK FXUUHQFLHV ZH VKRXOG ORRN DW ZKDW \LHOGV ZH VKRXOG look at9
UHVXOW HYHU\RQH·V ´&DUU\ 7UDGHµ LV GLIIHUHQW 7KHUH DUH *
&DUU\ WUDGHV WKDW JR ORQJ HTXDO
DPRXQWV RI WKH WKUHH KLJKHVW \LHOGLQJ FXUUHQFLHV DQG JR VKRUW HTXDO DPRXQWV RI WKH WKUHH ORZHVW \LHOGLQJ FXUUHQFLHV 2Q WKH RWKHU KDQG WKH SUHYLRXVO\ UHIHUHQFHG SDSHU VHWV WKH VL]H EDVHG RQ KRZ GLIIHUHQW WKH \LHOG LV IURP WKH DYHUDJH \LHOG RI DOO FXUUHQFLHV LQFOXGHG
7KHUH DUH DOVR &DUU\ WUDGHV WKDW RQO\ LQFOXGH HPHUJLQJ PDUNHWV DQG RWKHUV WKDW LQFOXGH ERWK * DQG HPHUJLQJ PDUNHW FXUUHQFLHV Others change the VL]H RI WKH ´ORQJµ DQG ´VKRUWµ SRVLWLRQV WR DGMXVW IRU WKH YRODWLOLWLHV RI WKH YDULRXV FXUUHQFLHV
The one saving grace to the Gordian Knot11 presented
E\ DOO WKRVH YDULDWLRQV RI WKH &DUU\ 7UDGH LV WKDW WKH\ DOO GR WHQG WR KDYH VRPHZKDW VLPLODU UHWXUQ SDWWHUQV
6RPH DUH HYHQ DYDLODEOH RQ %ORRPEHUJ
6DGO\ D IHZ RWKHU WUDGHV DOVR VKRZ VLPLODU UHWXUQ SDWWHUQV HYHQ WKRXJK WKRVH WUDGHV KDYH QR FXUUHQF\ FRPSRQHQW $ VLPSOH ORQJ 86 (TXLW\ WUDGH RU D ORQJ +LJK <LHOG &RUSRUDWH 'HEW VKRUW 86 7UHDVXU\ WUDGH ERWK VKRZ PHDQLQJIXO VLPLODULWLHV WR WKH UHWXUQ IURP WKH &DUU\ 7UDGH V
$QG RGGO\ HQRXJK YHU\ IHZ SHRSOH VHHP WR DUJXH WKDW 86 (TXLWLHV RU ´&UHGLWµ DV UHSUHVHQWHG E\ WKH VHFRQG WUDGH DERYH DUHQ·W %HWDV DQG VR GRQ·W EHORQJ in SRUWIROLRV
*LYHQ WKDW P\ NH\ERDUG·V GRXEOH TXRWH NH\ KDV D OLPLWHG OLIHVSDQ IRU WKH UHVW RI WKLV DUWLFOH ZH·OO MXVW DVVXPH \RX IROORZHG RXU VXJJHVWLRQ LQ WKH ÀUVW SDUDJUDSK
2. You can read “US Equities” as “S&P500” to have a concrete example. 3. You can measure the correlation of daily total returns between the S&P500 and the US 10-year Treasury Note over the most recent 30+ years and get just about 0. 4. Equities 5. Treasuries 6. Binny, J. “Currency Management Style through the Ages,” Journal of Alternative Investments, Winter 2005, pp. 52-59. 7. Yes, currency managers really do these kinds of thing for fun… 7KH %DQN IRU ,QWHUQDWLRQDO 6HWWOHPHQWV %,6«RIWHQ FDOOHG ´WKH &HQWUDO %DQNV &HQWUDO %DQNµ HYHQ SXEOLVKHG DQ DUWLFOH LQ WKHLU 0DUFK
DQG HYHQ ZKDW ´KLJKµ DQG ´ORZµ PHDQV $V D
4XDUWHUO\ 5HYLHZ SRLQWLQJ WKH ÀQJHU DW ´WKH
carry trade” and its role in the extreme exchange rate movements during the Global Financial Crisis in 2007-2009. Kohler, M. “Exchange Rates during Financial Crises,” BIS Quarterly Review, March 2010, pp. 39-50.
9. Though, to be honest, most people do use the implied forward (i.e. deposit) rate for “yield”. :H·G QRWH WKDW &DUU\ 7UDGHV WKDW XVH ERWK * DQG (PHUJLQJ 0DUNHWV KDYH D YHU\ VWURQJ ELDV WRZDUGV EHLQJ ORQJ (0 DQG VKRUW * FRQVWDQWO\«VR RQH FRXOG MXVWLÀDEO\ FDOO WKDW “Emerging Markets Beta” rather than “Carry Trade Beta”!
11. Which means we can “solve” it much like Alexander’s did… 12. The RBS Carry Trade Index (RBSFXY), for example. The RBS indices are what were the ABN AMRO indices referenced in the Currency Ages paper.
Autumn 2011 | Currency Investor 35
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92