Latest news with #currencyhedging
Reuters
3 days ago
- Business
- Reuters
Why the dollar's wobble could be self-perpetuating
LONDON, May 29 (Reuters Breakingviews) - Foreign currency hedging is not a topic that usually dominates the water-cooler chats on trading floors. Right now, however, it's front of mind for many of the biggest players in financial markets. The U.S. dollar's unusual moves in April, when it fell in tandem with stocks, has cast doubt over a long-lasting relationship between the greenback and risky assets. Over time, it might nudge non-U.S. investors to hedge more or reduce their exposure to American stocks and bonds. Both could create a self-reinforcing downward cycle for the dollar. Investing abroad is a tricky business for money managers with liabilities denominated in the currency of their home country. Think German or Japanese insurers, whose policies are written in euros and yen, or Canadian and Australian pension funds, whose beneficiaries expect to finance their retirement in Canadian and Aussie dollars. Buying shares and debt issued by companies in other countries introduces the danger that foreign exchange swings will reduce the value of the investments in local-currency terms, even if the underlying returns are good. That is why investors tend to use foreign exchange forwards and other derivatives to hedge currency risks, effectively swapping far-flung exposures into domestic ones. The beauty of holding U.S. assets, though, is that the dollar tends to strengthen when the market panics. In money-manager speak, it's an anti-cyclical currency, which means investment bosses can get away with minimal protection against foreign exchange risk on giant portfolios of American stocks and bonds. It also helps that the dollar has generally risen in recent years, providing foreign investors with an extra boost to their overall returns. One study, opens new tab, published by the National Bureau of Economic Research, found that foreign insurers, pension funds and mutual funds hedged 44%, 35% and 21% of their respective dollar portfolios in 2020, with much higher ratios for bonds compared to stocks. Apply that range to the $30 trillion of total American assets held by non-U.S. investors as of last year, and the implication is that anywhere between $24 trillion and $17 trillion could be unhedged. Take the Canada Pension Plan Investment Board for example. U.S. dollar exposures account, opens new tab for more than half of its net investments of $520 billion, but are minimally hedged, according to a person familiar with the portfolio. Several people involved in the running of different Canadian retirement funds told Breakingviews that the safe-haven nature of the greenback was a key reason for relatively low hedge ratios. Japan's giant Government Pension Investment Fund, meanwhile, had invested almost a third of its $1.7 trillion portfolio in American assets as of March 2024 with slightly more than half in stocks and the rest in bonds. The U.S. exposure was almost entirely unhedged, a person familiar with the matter told Breakingviews. According to traders and analysts these large so-called 'open' positions in U.S. assets have caught the attention of currency market players in recent months, for two reasons. First, the dollar didn't live up to its safe-haven billing after U.S. President Donald Trump's tariff plan tanked stocks in early April. The greenback fell roughly 5% against a basket of other rich-world currencies and failed to rebound alongside the S&P 500 Index when trade tensions cooled. The upshot for foreign investors is that volatile U.S. policymaking may cause the dollar to gyrate in the same way as equity markets. If that becomes the norm, foreign investors' risk models would over time call for much more dollar hedging. The second consideration is that Trump and his advisers seem set on weakening the currency in a bid to boost exports. That is cementing a sense in foreign currency markets that the dollar is unlikely to see another 2022-style surge in strength, meaning overseas investors may be more likely to get a drag from the greenback rather than a lift. One open question is whether it is even possible for large pension funds and insurers to meaningfully increase the proportion of their dollar portfolios that are hedged. In places where local institutions' holdings of U.S. assets are large relative to the local market, such as Taiwan or Nordic countries like Sweden, a big increase in demand for FX derivatives could meaningfully affect the value of the domestic currency. The Taiwan dollar's recent surge against the greenback looks like a case in point. Even in deeper markets like the Japanese yen, euro or Canadian dollar, hedging comes at a price. The typical method is to use forward contracts, which involves locking in an exchange rate by agreeing to buy one currency and sell another at a future date. The cost is largely determined by the difference in government bond yields between the two markets. Relatively high U.S. interest rates therefore make it expensive for local investors to hedge their dollar exposure. One-year contracts currently imply a roughly 2% annual cost for Canadian and European investors and 4% for those in Japan, according to Breakingviews calculations. The implication is that institutions which hedge an extra quarter of their U.S. portfolio could reduce returns by 0.5 percentage points to 1 percentage point, all else being equal. That raises the bar for holding American assets relative to home-country ones. The alternative to extra hedging is for big institutional investors to shrink their exposure to the U.S., for example by investing the marginal euro, yen or loonie elsewhere. Pension managers and insurers generally take months or years to change their investment policies, meaning any shift won't be immediate. Yet there are signs that both may already be happening in a small way. Traders and investors say the recent slide in the dollar is partly due to extra hedging activity, which mechanically weakens the currency that is being hedged. Meanwhile, non-U.S. participation in a recent 30-year Treasury bond auction was the lowest since 2019, Reuters reported. The danger, from a dollar holder's perspective, is that these trends reinforce one another. A weaker and more volatile greenback may inflict losses on foreign owners of U.S. assets, inducing them to sell or hedge more, in turn weakening the currency even further. At some point American assets might look cheap enough for global investors to pile back in – but not before the dollar falls further. Follow @Breakingviews, opens new tab on X
Free Malaysia Today
5 days ago
- Business
- Free Malaysia Today
FX hedging cost drop sparks debate on Asia bond defence bets
Three-month forward implied yields for dollar-won have fallen to around 1.7% this week, the lowest level in more than two years. (EPA Images pic) SINGAPORE : A decline in currency hedging costs across Asia is fueling a debate among bond investors on whether they should fortify their portfolios with cheap protection or let the opportunity slide. Three-month forward implied yields for dollar-won have fallen to around 1.7% this week, the lowest level in more than two years, signaling plummeting hedging costs for South Korean bonds. The same gauges for currencies in Thailand, Indonesia, China and India are also below their one-year averages, according to Bloomberg calculations. Currency hedging costs are falling at a crucial time for investors funding their holdings in Asia with dollars due to elevated market volatility fueled by US policy whiplash and de-dollarisation concern. However, investors with the stomach for risk could also look for any further declines in the dollar as it would enhance returns on their local currency assets. Dollar or euro-funded investors would be more comfortable investing in Asia local-currency fixed income with currency hedges, according to Frances Cheung, head of FX and rates strategy at Oversea-Chinese Banking Corp. 'There has been robust foreign inflows into China's Negotiable Certificates of Deposit (NCD) on the pick-up after hedging, and even if hedged returns narrow further after this, flows may still come in if diversification is the goal,' she added. An investor who hedges a long position in a one-year China NCD with a 12-month dollar-offshore yuan forward will pocket a return of 52 basis points over US SOFR, or 4.85%, according to Bloomberg calculations. 'Lower hedging costs or higher yield pickup will remain a tailwind for Asia local-currency government bonds, and is the most attractive in China and Thailand,' said Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence. 'Hedging costs have fallen as US front end rates remain high, while Asia front end rates are down on easing expectations,' he added. Central banks in Indonesia, India, Thailand and South Korea have lowered their key rates by a cumulative 175 basis points so far this year while the Federal fund rate has remained unchanged over the same period. A drop in forward-implied local currency yields relative to American rates makes it cheaper for US-based investors to go short Asian currencies and long the dollar for hedging against potential foreign-exchange losses on their bond portfolios. The dollar-baht three-month forward implied yields are two standard deviations below the one-year average. The same gauge for Indonesia, China and Taiwan stands at -1.40, -1.36 and -0.53 respectively. Bank of Korea trimmed policy rates by 25 basis points today as was widely expected, while flagging the likelihood of more interest rate cuts to come, which is likely to further drag down hedging costs. May inflation data from Thailand, Indonesia, the Philippines and South Korea early next month will also set the tone for monetary policies in those nations and therefore their currency hedging costs.
Bloomberg
5 days ago
- Business
- Bloomberg
FX Hedging Cost Drop Sparks Debate on Asian Bond Protection Bets
A decline in currency hedging costs across Asia is fueling a debate among bond investors on whether they should fortify their portfolios with cheap protection or let the opportunity slide. Three-month forward implied yields for dollar-won have fallen to around 1.7% this week, the lowest level in more than two years, signaling plummeting hedging costs for South Korean bonds. The same gauges for currencies in Thailand, Indonesia, China and India are also below their one-year averages, according to Bloomberg calculations.
Zawya
13-05-2025
- Business
- Zawya
Australia's pension funds start questioning US strategies
SINGAPORE/SYDNEY - Funds in Australia's A$4.2 trillion ($2.7 trillion) pension sector are rethinking some of their long-held strategies of buying U.S. assets and the dollar, as confidence in American growth wanes. Volatility around Sino-U.S. trade tensions this year has forced investors to reassess their U.S. exposure and the role of the dollar, which has lately failed to behave as a safe haven currency amid heightened uncertainty around Washington's economic policy. While there have not yet been any major shifts in strategy, currency dealing desks in Australia have noticed modest changes in hedging demand from some pension funds. Those hedging tweaks are under the spotlight globally and Australia's pension funds, known locally as superannuation funds, have long kept low FX hedging ratios on large and growing foreign stock portfolios. When U.S. equities fell, funds allowed hedging ratios to rise by not keeping their currency positions exactly in step with asset prices, said Troy Fraser, head of foreign exchange sales for Australia and New Zealand at Citi in Sydney. "You would expect the funds to be selling Aussie and buying U.S. to adjust or to rebalance their hedge ratio," he said. "We've seen a little bit of that, but not a lot. I think funds are generally happy to be longer Aussie." Fraser said funds were weighing their asset mix, hedging costs and the outright level of the Aussie. Were it to extend it could move the currency, and in separate research Citi in February estimated that a 5% shift in hedging now could push the Australian dollar as much as 11% higher against the greenback. At about $0.64, it's been falling on the dollar for nearly 15 years since touching $1.10 in 2011. Along with a tendency to drop reliably whenever global stocks fell, cushioning losses in Aussie dollar terms, the Aussie's behaviour encouraged a low hedging ratio. Industry-wide hedging on foreign equities was roughly 22% in the December quarter, according to the most recent regulatory data. "Unhedged has worked," said Ben McCaw, a senior portfolio manager at MLC Asset Management. "It was lowering the volatility of the portfolio (and) providing a positive return to the portfolio ... so that was almost the ultimate asset," he said. Now, however, long- and short-term factors are starting to shift how the Australian currency trades. He has been reducing U.S. dollar currency exposure for about three years. Others are keeping a watching brief. CBUS, which manages more than A$100 billion, has kept currency exposure steady but the U.S. dollar, which fell through market turbulence in April, caught the attention of fund CIO Leigh Gavin. "The USD is probably one of the few asset classes that hasn't rebounded from the early April lows, and we think that's interesting," he said. "It's certainly something we're monitoring, but it's still pretty early days." 'QUESTIONING OUR EXPOSURE' Some fund chiefs say U.S. allocations are under review. Australian super funds run a high allocation to equities, by global standards, at nearly 60%, according to regulatory data, with roughly half that abroad, as of December 2024. According to Westpac, some A$555 billion is invested in U.S. stocks by Australian domiciled investors. "That's been a very good place to be investing over the last couple of years," said John Pearce, chief investment officer of A$139 billion fund UniSuper on the fund's podcast in April. "Like every other fund, we are questioning our exposure to the U.S. It would be fair to say that we've hit peak exposure and will be reducing over time," he said. To be sure, no increase in the fund's hedging ratio, which typically swings between 30-40%, is being considered, a UniSuper spokesperson said in emailed remarks to Reuters. And there are very big funds that are not budging in their strategies. "We have no view of changing our hedge position or any of our positions based on that event," said Michael Clavin, head of income and markets at Aware Super, referring to last month's tariff-driven drawdown and market volatility. The chief investment officer of AustralianSuper, the largest super fund with more than A$365 billion under management, also told the Financial Times last month it would continue investing more than half its offshore flows into the U.S. Still, the Aussie's 3% rise against the U.S. dollar this year has meant the year-to-date 0.6% drop in the S&P 500 translates to a near 3.5% fall in Australian dollar terms, which if it persists or extends could start to drive a response. "Being underweight the Aussie dollar has been something which has typically rewarded Australian investors," said Cameron Systermans, head of multi-asset in the Asia-Pacific at fund manager and adviser Mercer. "So if there were to be a durable uptrend in the Aussie dollar, that would be a bit of a pain trade, I think, for a lot of the asset owners in Australia. And it might force them to really reassess whether that still makes sense." ($1 = 1.5625 Australian dollars)
Reuters
13-05-2025
- Business
- Reuters
Australia's pension funds start questioning US strategies
SINGAPORE/SYDNEY, May 13 (Reuters) - Funds in Australia's A$4.2 trillion ($2.7 trillion) pension sector are rethinking some of their long-held strategies of buying U.S. assets and the dollar, as confidence in American growth wanes. Volatility around Sino-U.S. trade tensions this year has forced investors to reassess their U.S. exposure and the role of the dollar, which has lately failed to behave as a safe haven currency amid heightened uncertainty around Washington's economic policy. While there have not yet been any major shifts in strategy, currency dealing desks in Australia have noticed modest changes in hedging demand from some pension funds. Those hedging tweaks are under the spotlight globally and Australia's pension funds, known locally as superannuation funds, have long kept low FX hedging ratios on large and growing foreign stock portfolios. When U.S. equities fell, funds allowed hedging ratios to rise by not keeping their currency positions exactly in step with asset prices, said Troy Fraser, head of foreign exchange sales for Australia and New Zealand at Citi in Sydney. "You would expect the funds to be selling Aussie and buying U.S. to adjust or to rebalance their hedge ratio," he said. "We've seen a little bit of that, but not a lot. I think funds are generally happy to be longer Aussie." Fraser said funds were weighing their asset mix, hedging costs and the outright level of the Aussie. Were it to extend it could move the currency, and in separate research Citi in February estimated that a 5% shift in hedging now could push the Australian dollar as much as 11% higher against the greenback. At about $0.64 , it's been falling on the dollar for nearly 15 years since touching $1.10 in 2011. Along with a tendency to drop reliably whenever global stocks fell, cushioning losses in Aussie dollar terms, the Aussie's behaviour encouraged a low hedging ratio. Industry-wide hedging on foreign equities was roughly 22% in the December quarter, according to the most recent regulatory data. "Unhedged has worked," said Ben McCaw, a senior portfolio manager at MLC Asset Management. "It was lowering the volatility of the portfolio (and) providing a positive return to the portfolio ... so that was almost the ultimate asset," he said. Now, however, long- and short-term factors are starting to shift how the Australian currency trades. He has been reducing U.S. dollar currency exposure for about three years. Others are keeping a watching brief. CBUS, which manages more than A$100 billion, has kept currency exposure steady but the U.S. dollar, which fell through market turbulence in April, caught the attention of fund CIO Leigh Gavin. "The USD is probably one of the few asset classes that hasn't rebounded from the early April lows, and we think that's interesting," he said. "It's certainly something we're monitoring, but it's still pretty early days." Some fund chiefs say U.S. allocations are under review. Australian super funds run a high allocation to equities, by global standards, at nearly 60%, according to regulatory data, with roughly half that abroad, as of December 2024. According to Westpac, some A$555 billion is invested in U.S. stocks by Australian domiciled investors. "That's been a very good place to be investing over the last couple of years," said John Pearce, chief investment officer of A$139 billion fund UniSuper on the fund's podcast in April. "Like every other fund, we are questioning our exposure to the U.S. It would be fair to say that we've hit peak exposure and will be reducing over time," he said. To be sure, no increase in the fund's hedging ratio, which typically swings between 30-40%, is being considered, a UniSuper spokesperson said in emailed remarks to Reuters. And there are very big funds that are not budging in their strategies. "We have no view of changing our hedge position or any of our positions based on that event," said Michael Clavin, head of income and markets at Aware Super, referring to last month's tariff-driven drawdown and market volatility. The chief investment officer of AustralianSuper, the largest super fund with more than A$365 billion under management, also told the Financial Times last month it would continue investing more than half its offshore flows into the U.S. Still, the Aussie's 3% rise against the U.S. dollar this year has meant the year-to-date 0.6% drop in the S&P 500 (.SPX), opens new tab translates to a near 3.5% fall in Australian dollar terms, which if it persists or extends could start to drive a response. "Being underweight the Aussie dollar has been something which has typically rewarded Australian investors," said Cameron Systermans, head of multi-asset in the Asia-Pacific at fund manager and adviser Mercer. "So if there were to be a durable uptrend in the Aussie dollar, that would be a bit of a pain trade, I think, for a lot of the asset owners in Australia. And it might force them to really reassess whether that still makes sense." ($1 = 1.5625 Australian dollars)
