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- Jul 12, 2011
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The fight to save the euro is under way, but some investors already have moved 5,000 miles east, to what they see as the next threat: a slowdown in China, the world's second-biggest economy.
Preparing for a tempering of China's explosive growth isn't as simple as betting against the yuan, whose value is tightly controlled by the Chinese government. Instead, investors are targeting the currencies of Australia, Brazil, South Korea and other countries dependent on China's demand for raw materials and other goods.
Increasingly, they are putting on positions that would profit from a weakening in the likes of the Australian dollar and Brazilian real. That is putting pressure on these currencies, which rose in the first half when investors were more optimistic about global growth, but have more recently experienced volatile swings.
George Papamarkakis, co-founder of London-based hedge fund North Asset Management LLP, said he is concerned about declining investment in China's real-estate sector and what that will mean for demand for iron ore from Australia. Iron ore is the primary ingredient in steel, which is used in construction. Thanks in part to the iron-ore trade, China is Australia's biggest trading partner.
Mr. Papamarkakis, who manages some $200 million, is preparing to short, or bet against, the Australian dollar once again. He cashed out this trade in October after the Australian dollar had fallen more than 10% from its 2011 high as Europe's debt crisis sent investors scrambling to reduce risk. If it climbs against the U.S. dollar to $1.04 from near $1.02 now, he is likely to take out bets against the currency. Late Friday in New York, the Australian dollar was at $1.0218 from $1.0167 late Thursday.
"In China, the growth mix will be less investment-led, which should be negative for the commodity currencies like the Australian dollar," he said. His fund is up 20% this year.
Mr. Papamarkakis isn't alone. Roughly 17% of net positions held by currency funds are negative bets against the Australian dollar, as of Nov. 30, according to JW Partners, a research and advisory firm that tracks the performance of 27 funds that have a combined $20 billion under management in currency strategies.
That is a reversal from March, when 9% of these investors' net positions were positive bets on Australia's currency. The Brazilian real has undergone a similar reversal, with investors switching from 3.5% net positive positions in March to 0.5% against in November. Meanwhile, investors soured on the Korean won, going from holding 3.95% of investments in net positive positions, to 2.3% against over the same period. The switch occurred as the real and won slumped from highs against the dollar in late July and early August to lows for the year in September and October. Late Friday in New York, the dollar was at 1.8175 reis compared with 1.7993 reis late Thursday, and was at 1,145.30 won compared with 1,132.20 won.
"We have noticed a significant change in growth expectations, with moods going from quite optimistic to rather negative," JW Partners' Luca Avellini said, adding the negative Australian dollar position is "the most significant short position managers have."
Stephen Jen, founder of SLJ Macro Partners LLP, said he is looking at the tensions in Europe and how they may spill over to China and other emerging-market countries. He said he is "worried about people who aren't worried," given the direction the world economy appears to be headed.
He said there is a high likelihood that this year's popular currency bets, including those that would profit from the strengthening of the Australian dollar, Korean won and Brazilian real, could quickly come undone, especially as some central banks change course. After raising rates five times this year, Brazil's central bank in August began cutting rates to help its slowing economy.
"We're moving into a quite dangerous phase," he said, referring to the prospect of rising volatility in currency markets.
China, though, is taking steps to shore up its own economy. Recently, some capital-reserve requirements for banks were loosened to encourage lending. China has a track record in sustaining growth: Its economy continued to expand following the 2008 financial crisis thanks to a big government spending program. Continued growth in China would support the riskier currencies. Even as its economy slows, China still is projected to rank as one of the world's fastest-expanding economies.
In October, China saw its first monthly outflow of foreign currency since 2007. China also is expected to post weak export figures in its latest report on Saturday. And on Friday, the yuan dropped to the lower end of its government-controlled trading range for the eighth-straight session, a sign investors fear China might guide its currency lower to make its exports more attractively priced.
"There's a problem building in China," said a New York hedge-fund trader who manages about $250 million. The move to cut bank requirements "is a sign that they're panicking about something," he said.
China Story Turns Negative - WSJ.com
Preparing for a tempering of China's explosive growth isn't as simple as betting against the yuan, whose value is tightly controlled by the Chinese government. Instead, investors are targeting the currencies of Australia, Brazil, South Korea and other countries dependent on China's demand for raw materials and other goods.
Increasingly, they are putting on positions that would profit from a weakening in the likes of the Australian dollar and Brazilian real. That is putting pressure on these currencies, which rose in the first half when investors were more optimistic about global growth, but have more recently experienced volatile swings.
George Papamarkakis, co-founder of London-based hedge fund North Asset Management LLP, said he is concerned about declining investment in China's real-estate sector and what that will mean for demand for iron ore from Australia. Iron ore is the primary ingredient in steel, which is used in construction. Thanks in part to the iron-ore trade, China is Australia's biggest trading partner.
Mr. Papamarkakis, who manages some $200 million, is preparing to short, or bet against, the Australian dollar once again. He cashed out this trade in October after the Australian dollar had fallen more than 10% from its 2011 high as Europe's debt crisis sent investors scrambling to reduce risk. If it climbs against the U.S. dollar to $1.04 from near $1.02 now, he is likely to take out bets against the currency. Late Friday in New York, the Australian dollar was at $1.0218 from $1.0167 late Thursday.
"In China, the growth mix will be less investment-led, which should be negative for the commodity currencies like the Australian dollar," he said. His fund is up 20% this year.
Mr. Papamarkakis isn't alone. Roughly 17% of net positions held by currency funds are negative bets against the Australian dollar, as of Nov. 30, according to JW Partners, a research and advisory firm that tracks the performance of 27 funds that have a combined $20 billion under management in currency strategies.
That is a reversal from March, when 9% of these investors' net positions were positive bets on Australia's currency. The Brazilian real has undergone a similar reversal, with investors switching from 3.5% net positive positions in March to 0.5% against in November. Meanwhile, investors soured on the Korean won, going from holding 3.95% of investments in net positive positions, to 2.3% against over the same period. The switch occurred as the real and won slumped from highs against the dollar in late July and early August to lows for the year in September and October. Late Friday in New York, the dollar was at 1.8175 reis compared with 1.7993 reis late Thursday, and was at 1,145.30 won compared with 1,132.20 won.
"We have noticed a significant change in growth expectations, with moods going from quite optimistic to rather negative," JW Partners' Luca Avellini said, adding the negative Australian dollar position is "the most significant short position managers have."
Stephen Jen, founder of SLJ Macro Partners LLP, said he is looking at the tensions in Europe and how they may spill over to China and other emerging-market countries. He said he is "worried about people who aren't worried," given the direction the world economy appears to be headed.
He said there is a high likelihood that this year's popular currency bets, including those that would profit from the strengthening of the Australian dollar, Korean won and Brazilian real, could quickly come undone, especially as some central banks change course. After raising rates five times this year, Brazil's central bank in August began cutting rates to help its slowing economy.
"We're moving into a quite dangerous phase," he said, referring to the prospect of rising volatility in currency markets.
China, though, is taking steps to shore up its own economy. Recently, some capital-reserve requirements for banks were loosened to encourage lending. China has a track record in sustaining growth: Its economy continued to expand following the 2008 financial crisis thanks to a big government spending program. Continued growth in China would support the riskier currencies. Even as its economy slows, China still is projected to rank as one of the world's fastest-expanding economies.
In October, China saw its first monthly outflow of foreign currency since 2007. China also is expected to post weak export figures in its latest report on Saturday. And on Friday, the yuan dropped to the lower end of its government-controlled trading range for the eighth-straight session, a sign investors fear China might guide its currency lower to make its exports more attractively priced.
"There's a problem building in China," said a New York hedge-fund trader who manages about $250 million. The move to cut bank requirements "is a sign that they're panicking about something," he said.
China Story Turns Negative - WSJ.com
