FX MANAGERS
As well documented, carry strategies tend to perform better in low volatility markets, but an indispensable pre- condition is enough dispersion in the level of interest rates around the world. Low and converging interest rates are detrimental to income oriented strategies. High volatility markets are not necessarily a bad outcome, as long as volatile currency moves also show a good degree of directional p e rsis t e nc y . Instead, the most c h a l l e ng ing env i r onment for currency markets is one of “high volatility of volatility” where large and volatile ranges occur in the context of no sustained trends. Price action tends to be erratic and unstable, with minimal directional persistency. Stop-levels are easily triggered, and false macro signals are oſten generated, causing the typical “buy high, sell low” negative outcome.
Both systematic programs and discretionary investment decisions tend to suffer, especially when volatility is caused by exogenous
shocks such as recurrent headline risk, and central banks interventions (actual or verbal).
FXTM Can you give us an example of a memorable winning trading decision?
AL Te most memorable winning
FX
pointed to a bearish outlook for commodity currencies such as the Australian and Canadian dollars, while
also signaling potential
outperformance of “defensive/ repatriation” currencies such as the US dollar and the Japanese Yen. In the next few weeks, the cross AUDJPY fell by more than 30%. This trade was d r ama t i c a l l y fueled
by a
global unwind of carry trades, caused by the b a n k r u p t c y of Lehman Brothers, the rescue of AIG and the
panic
that unfolded in the last quarter of the year. While the escalation of the credit crisis
trading decision dates back to the last few months of 2008, before the birth of the standalone currency fund, when we were running our systematic currency overlay program in our international fixed income funds. In early September, several models flashed warning signs of a
synchronized global economic
slowdown. In particular, the rollover in key cyclical commodity markets such as industrial metals and energ y
provided incredible support to the trade, I am convinced the “slowdown
trade” dramatic was events. going
to be successful even without those
That
said, the systemic market sell- off contributed to a successful trading decision with speed and magnitude that were unprecedented. Of course, past performance doesn’t guarantee future results.
FX TRADER MAGAZINE July - September 2013 57
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