$1 Trillion Fund Buys Yen as Trade Ruckus Vexes Dollar Bulls

(Bloomberg) -- Amundi SA, which oversees more than $1.1 trillion, is buying the Japanese yen and selling Canada’s currency as U.S. President Donald Trump’s push toward trade protectionism threatens to overshadow his promise of fiscal stimulus.

“Since Trump’s victory in November, the market has been focusing too much on the fiscal policy and bought the dollar,” James Kwok, the London-based head of currency management at Amundi, said in an interview. “Now it’s time to see the correction back to reality on the trade policy.”

Currencies of economies with big external surpluses including the yen will benefit when trade conflicts flare up, while the Canadian dollar is set to lose because of the nation’s current account deficit, said Kwok, whose fund has added to positions that will benefit from worsening tensions. Japan’s currency has strengthened 3.6 percent versus the dollar this year, while the loonie has trailed most of its Group-of-10 peers with a 1.6 percent gain.

UBS Group AG, the world’s largest private bank, is advising clients to build positions that will profit from the dollar’s decline or trim bullish wagers on the greenback against currencies including the euro, yen and Swedish krona, according to Maximilian Kunkel, a Zurich-based senior investment strategist for ultra-high-net-worth individuals. The dollar will likely peak in the next few months as differences in economic performance and real interest rates between the U.S. and the rest of the world start to diminish, Kunkel said.

Bloomberg’s gauge of the greenback has declined more than 1 percent since Trump’s inauguration speech on Friday, when he hammered on an “America First” message. His decision to withdraw from the Trans-Pacific Partnership trade deal and comments by Treasury Secretary nominee Steven Mnuchin that an “excessively strong dollar” could have a negative short-term effect on the economy intensified selling in the greenback.

Spending Promises

Rhicon Currency Management, a hedge fund which manages about $520 million, is turning to tactical trades, moving in and out of positions within 48 hours, as it avoids wagering on the dollar’s long-term direction, said Christopher Brandon, the firm’s Singapore-based co-founder. It’s too early to tell if the U.S. currency’s decline is just a “healthy correction” before it resumes its rally, or if Trump’s policies will discourage a strong dollar, he added.

The market’s bullish dollar wagers -- built on speculation that Trump’s pro-growth policies will spur the Federal Reserve to speed up interest-rate increases -- might unravel if the currency extends its drop past 112 yen, $1.28 against the pound or $1.09 versus the euro, Brandon said. The greenback rose 0.2 percent to 112.91 yen as of 3:02 p.m. in Tokyo, and traded at $1.2510 versus sterling and $1.0755 against the euro.

The U.S. economic outlook is uncertain under the Trump administration and the Fed is set to raise interest rates at least once this year, Amundi’s Kwok said. Futures traders are pricing in the probability of two moves in 2017.

“Trade policy has so far been under-priced in the market,” said Kwok. “Volatility is expected to increase when the trade policy and fiscal policy fight to dominate the headlines.”

To contact the reporter on this story: Netty Ismail in Singapore at nismail3@bloomberg.net. To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani