Low interest rates and quantitative easing programmes have caused a significant proportion of global government bond markets to trade with negative yields. Other risk assets have been supported by monetary and fiscal easing, and the uncertain outlook makes it difficult to assess valuations. We believe that there are a number of features that make currency alpha strategies an attractive asset class given this backdrop.
In this paper we outline the advantages of active currency strategies:
- Currencies are a true relative value asset class
- Active currency strategies can be a source of pure alpha
- Currency strategies can be highly capital efficient
- Deep liquidity means strategies can be quickly adapted
We then provide three reasons why we believe currency volatility is unlikely to return to the lows of 2019, potentially benefiting returns:
- The economic fallout from the current crisis is likely to be severe and long lasting
- Central banks are unlikely to be able to successfully contain market volatility
- The notable rise in trade frictions and uncertainty we have witnessed in the past few years is likely to mean we have seen the peak in globalization
Finally, we outline our approach to currency alpha, which is very different to the type of currency management often implemented under the umbrella of a global fixed income portfolio.