2015 was a very challenging year for markets. Equities and bonds have begun to reflect – dare we say it? – a touch of realism after so many years of monetary support. Add to this the collapse in commodity prices, fed in part by falling Chinese demand, and the first indications that the major central banks have finished with easing and we face much uncertainty in the coming year.
The Alpha Blend Global Currency index was something that definitely did work however. Amid big moves in the Euro and many emerging market currencies, our managers managed a very respectable gain of close to 8 percent net of fees. Thanks to the balanced nature of our index, downside risk – volatility has been kept to just under 5 percent.
We’ll begin with the monthly scorecard: The Euro gained 2.7% against the dollar while the Yen also gained 2.5% following confusing language from BOJ with regard to further easing. The biggest gainer among the major pairs was NZD, up 5%. Losing out was CAD – down close to 4% on oil worries, while GBP dropped 2% as the battle for BREXIT heats up.
Among the emerging market pairs, the big loser was ZAR, dropping 11% intra‐ month following the dismissal of another finance minister. The currency ended with a loss of 7%. South Africa is beleaguered with political crises, and has seen its major mining companies hit hard.
But as December began, the dollar was on a tear ahead of a much‐anticipated ECB meeting which was expected to reveal an aggressive extension and an increase in quantitative easing. The Federal Reserve was widely expected to begin a rate increase program just 2 weeks later. But the ECB failed to deliver and the Euro jumped from 1.0500 (almost matching the March low) to 1.1000 – the biggest upside move in 6 years. Some of this move was no doubt due to the traditionally less liquid state of markets in December but markets pretty much defined the range for the rest of the month between the day of meeting and the next.
Whether one should give credence to the ECB’s economic projections (which actually had been released the day before the meeting and were quite optimistic (a hint that most chose to ignore) or whether, like the Fed, the ECB is attempting to pull back from excess liquidity creation – resisting a further dive into negative interest rate territory is hard to say. But the whole thing lacks credibility when seen against the backdrop of a very cloudy global outlook.
And so to the Fed: on December 16, rates were hiked by the anticipated 25bp. The accompanying text was not particularly hawkish, although the stage seems set for a series of up to 4 rate hikes in 2016. But then again, the stage was set for a rate hike over 2 years ago so we understand the muted reaction in the markets. Although US employment data remains strong, manufacturing is weak, ignoring the oil production industry, itself now emulating the Saudi policy of just pumping, even as US crude prices plunged another 12% for the month to $37/bbl.
It is clear that major exporting companies in the US are being hit hard by the combination of the slowdown in Chinese demand and a strong dollar. With China now firmly in the currency game, allowing a 5% devaluation against the dollar in 2015 we should expect more to come. After all, against the Euro, China appreciated 5%. We should remember the reaction in August (stock market meltdown) that accompanied the surprise beginning of this process.
We will note also that Brazil’s woes worsened in December as a second rating agency cut them to junk (Fitch).
In all, a very messy month, but one that our managers profited from, notably due to ZAR, BRL and GBP declines. We were able to demonstrate that the non‐ correlated opportunities in bi‐directional currency trades have always provided a hedge against markets in dislocation.
As we begin 2016, markets are looking for further dollar strength among the major pairs. We caution that recently, upheavals in global markets no longer seem to favour the dollar. We still favour the higher yielding AUD and NZD currencies and we will need to pay close attention to the situation among emerging market currencies. A ratcheting‐up of tension in the Middle East (Iran – Saudi) may provide some relief for oil which in turn could spark a short‐ covering commodity rally. China remains a dangerous wild card in terms of shock potential.
We wish all readers a safe and prosperous New Year and we are looking forward to providing investment value through our currency index.