Three currency bets hedge funds are championing

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After a tumultuous 2013, hedge funds are showing renewed confidence that their currency bets are about to pay off.

2013 was a tough year for currency traders – a statement which includes a disappointing year for the American dollar.

Overall, Hedge Fund Research suggests the average of the macro currency fund was up just 0.42% in the 11 months leading up to November – a lackluster figure fueled by nations weakening their currencies to boost economic growth.

Yet now, as hedge funds predict countries’ economies will grow on different scales, stronger returns are expected in currency trading.

Before the outline of three key currency trends for 2014, a brief overview of the terms involved:

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  • If someone is “shorting” a currency, they believe the currency will go down against another currency.
  • If someone says they are “going long” – the opposite applies, and the trader believes the currency will increase in comparison to another.
  • If a trader thinks a currency will move a lot in a certain direction, the betting is called a strangle.
  • If a trader predicts the currency won’t move much at all its known as a straddle.

The top three currency bets for ‘14

1. Long sterling against the euro

The UK’s economic resurgence meant the pound was one of the biggest surprises of last year.

Earlier this year, the pound ticked higher against the euro as data highlighted the Eurozone’s trade surplus showed weakness.

So even though inflation has fallen and the Bank of England is expected to lower its rate hike threshold, the UK is seen to be heading down a positive path – something that can’t be said about the Eurozone.

2. Long dollar against yen

On Monday, the greenback set a two-month high against the euro, with experts predicting the signs of an improving labour market should mean the Federal Reserve will continue its gradual withdrawal from bond-buying.

This will likely boost the dollar as investors sink money into Treasury yields.

And with the Bank of Japan’s loose monetary policy meaning the potential for even more stimulus in 2014, hedge funds expect this trade – after a lucrative 2013 delivering 21% – to continue bearing fruit.

3. Long dollar against the Canadian dollar

This last, and exceedingly popular bet, is expected to pay off now the Canadian dollar hit a four-year low in the middle of January.

After succumbing to the relative strength of the American dollar last year, the loonie – as the Canadian dollar is affectionately known – dropped 7% in a year.

The struggle continued in 2014, with reports so far indicating a drop of 3% as the currency struggles to maintain its weight with a lackluster job market.

Reports indicate leveraged funds’ shorts bets on the Canadian dollar are more than four times more popular than long bets.

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