FX Multi Strategy – September 2018

With the summer period at an official end the markets returned to school so to speak. The recent volatility appeared from a number of key drivers which impacted the emerging market currencies. The sudden devaluation of the Turkish Lira last month is a notable event still fresh in our minds. Trading FX Multi Strategy programs that deliver strong returns can experience the occasional market retreat. The importance is being able to identify both the opportunistic moments and when trading risk needs to be reduced. When looking at the economic data, the strength behind the US economy has outweighed the moderating growth in other economies. As a result, the investor sentiment towards non-US risk assets has dissipated to a degree. The US dollar has also enjoyed recent strengthening across the board, aided by tighter financial conditions and reduced global liquidity.

Electoral events have been a key motivator around the globe. This is unlikely to change any time soon, especially with the global summits and the focus on trade deals. Consequently, the uncertainty around political agendas has dented investor risk sentiment. In turn the performance on risk assets has suffered particularly in the emerging markets. Furthermore, country specific weaknesses such as trade sanctions or policy reforms are able to spread contagion risk to other EM countries.

European eyes are on Italy

Heading into the end of the month, European investors have been cautious as of late. In addition to investor prudence ahead of the pending FED meeting, eyes are on Italy’s budget announcement. As a backdrop to this announcement, last month the ECB surprised markets with their statement of rebounding inflation. The outcome of this ECB announcement was clear, moments later the Euro along with interest rates gained. However, an expected FED rate hike reflected a strong US economy and reducing recessionary fears resulted in a Dollar rally. Despite the rate hike being discounted by the bond market, the Dollar rose significantly against the Euro.

The policy situation in Italy, emphasised the weakness of the Euro against the Dollar. Unfortunately, the targeted budget deficit was higher that expected. In the days following the market reacted negatively to this news. The impact however was focused more on Italian bonds and equities with other EU risk assets being somewhat isolated. Financial assets did come under pressure across Europe as a whole. Euro legged trades in the FX Multi Strategy program exposed the currency portfolio to downside risks.