The recent fall of the Chinese yuan is driving hopes of a volatility boost for forex markets. However, any rise may be too late for the currency for those funds that have already shut down in 2019 and it might bee too small to have high hopes for the remaining ones.
Traders who squeeze out more profits in moments in which prices wildly change usually consider themselves harmed by the long-standing calm in foreign exchange markets that low interest rates and the fact that central banks have moved alongside monetary policies brought.
On August 12, Chinese yuan fell below 7 per dollar, and that lifted implied volatility (vol) to its highest point in the last eight months. However, the rise didn’t last for long: according to the Deutsche Bank’s index for three-month implied volatility among major currencies, the value came back to earth, to 7.52 after it reached as high as 8.11 after what happened to the yuan.
Diminished Opportunities
Currency investment funds considered the move as another case of volatility gauges threatening to come to life for a short period, only to subside shortly thereafter. FX futures and swaps, as well as similar platforms for buying and selling currencies, have seen opportunities to make money diminish: as a result, $2.34 billion went out of FX mutual funds, the highest amount in four years.
The flow of money going out has settled down considerably, with “only” $159.08 million in outflow in the period ranging from January to July, per data from Morningstar. However, total net assets at global-scale currency mutual funds have been reduced to $6.86 billion. Actually, they have gone down almost every year since reaching its highest mark in 2012 ($18 billion.) Fund managers are considering whether giving up is a good idea, with the vol metric on the majority of prominent currencies approaching record lows.
Throwing the Towel
Axel Merk, CIO of Merk Investments, stated that if the audience does not embrace it, then throwing the towel increases as a possibility. Merk also said that the company’s absolute return currency fund was “modest.” His $6.7 million funds closed this year, one of the 10 currency mutual funds to do it this year, with 17 announcing their closure last year.
According to Merk, the recent volatility upswings suggested that 2019 was shaping up to be better than last year. However, he observed that it hadn’t been the case. Hedge funds have also been affected, with 49 of them actively trading currency futures and cash forwards in the interbank market, per data from the BarclayHedge index. The number is a far cry from the 145 that were doing it in 2008 and the 53 at the end of last year.
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