A collapse in volatility across currencies is leading fund managers to scour every corner of the market for profit opportunities.
Central bank inaction has helped push measures of price swings to the lowest in years. Fund managers from Amundi Asset Management to Allianz Global Investors say this is causing them to turn away from traditional bets on the dollar and euro and toward emerging markets, carry trades and taking cheap punts in options.
“The cost of being wrong in options has never been lower,” said Timothy Graf, head of EMEA macro strategy at State Street Bank & Trust. “This really is where the current environment is interesting.”
Here’s what other portfolio managers and strategists are advising for a low-volatility world.
Look at Emerging Markets
The lack of big moves across developed markets means currency traders “need to venture into the darker corners of liquid emerging-market currencies,” according to Swissquote Bank SA’s head of market strategy Peter Rosenstreich.
The spread between Group-of-Seven and emerging-market volatility is widening. Hedge funds have begun re-weighting emerging markets versus the dollar, according to Lyxor Asset Management’s senior cross-asset strategist Philippe Ferreira.
Using the yen as a funding currency to buy the Indian rupee, Chinese renminbi or the Philippine peso would have yielded significant gains, according to Societe Generale SA strategist Kit Juckes.
Bet on Carry
Carry also looks attractive in this environment. This strategy of betting on divergence in interest rates is doing well, with a Bloomberg index measuring carry returns from eight emerging markets funded by the dollar gaining for a third week.
“I describe the current environment as everyone sitting on their hands not wanting to do too much,” said Andrew Cole, a fund manager at Pictet Asset Management. “That’s why carry trades are popular right now.”
Allianz money manager Kacper Brzezniak said he went long dollar-rand at the start of the year, before it rallied in February and March. “We got about 6 percent of the move, and I am very happy with that,” he said.