Euro appreciation catches global macro off guard

The dollar continued to depreciate against major currencies over the recent weeks, in a context where the U.S. administration has struggled to gain reform momentum in the health care and fiscal areas.

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This has far reaching market implications. In particular, this has contributed to fuel the rally in emerging market assets, both equities and fixed income, as local currency appreciation (vs. the dollar) has disinflationary effects and provides ample room for monetary accommodation. Over the recent weeks, South Africa, Colombia, Brazil and India cut policy rates, in some cases by a large magnitude.

Dollar weakness, which has accelerated since mid-July, has taken many Macro investors off guard. In particular, the rise of the Euro/Dollar currency pair was a significant detractor from performance for Global Macro managers.

They assume, and continue to assume, that monetary policy divergence between the U.S. and the Eurozone should lead to Euro weakness. Last week, the Lyxor Global Macro Index was down
- 0.8% which has brought its year-to-date performance to -4.3%.
However, there is one exception: EMfocused macro managers, which are poorly represented in Global Macro indices, delivered solid performances in July as they benefitted from the EM rally. Going forward, we believe that dollar depreciation has gone too far and maintain an overweight stance on Global Macro managers, a strategy that we had upgraded a month ago.

On a positive note, CTAs outperformed last week. They dramatically adjusted their positioning in the foreign exchange market over the recent months, and the asset class is now contributing positively to gains. Trend followers actually reversed their short EUR/USD positions over the course of May and are now long EUR.

In parallel, long positioning on equities also added to CTA gains. Finally the remaining hedge fund strategies were flat to slightly negative last week. Event-Driven and Fixed Income Arbitrage strategies took a pause after having delivered solid performances in the first half.

Lyxor Research , August 2017

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