Standard foreign exchange strategies fell in August with managers finding the going tough. According to DB FX Select Universe Returns Unfunded index, Foreign exchange strategies dropped by 2.08% from January to October 9, with some sliding 1.15% in August. James Binny, director of foreign exchange analytics and risk advisory at ABN Amro, managers suffered losses on the three universal FX strategies, i.e. carry, valuation or trend strategy. A carry trade is one where a manager borrows a currency with a low interest rate and invests in one with a higher rate; in a valuation/fundamental, manager holds a currency on the basis that it is expected to rise in value against another based on economic and other macro factors; and a trend manager invests according to market and investor trends.

Binny said: “The carry trade went horribly wrong at the beginning of August. Carry strategies went on to recover around half of their losses but a lot of people had to close their yen positions because the losses became too much. The lowest point for the carry trade was August 16, when the Australian dollar fell in value and the yen rose.” The US dollar downtrend throughout the year has hurt the valuation managers, while trend managers who followed expectations that the dollar would keep sliding in August were taken by surprise as the currency rose that month. Managers that manage derivative portfolios based on FX volatility booked losses in August owing to an upsurge in volatility, said Binny.

To think creatively, we must be able to look afresh at what we normally take for granted