God help me but a reader left a question about the DBV currency fund that I wrote about (and own personally) earlier this week. I answered him originally in the comments but wanted to expand on the answer.
Yesterday DBV was down $0.18. The reader noted that all the single currency ETFs (the ones from Rydex) were up and wanted to know if those funds up-DBV down would be a normal correlation.
My idiocy notwithstanding, DBV is unlikely to correlate to the dollar. DBV does not make a directional bet on the dollar. It offsets high yielding currencies and low yielding currencies. The idea is that higher yielding currencies outperform lower yielding currency; this is the big macro idea of the fund.
Quoting Kevin Rich who is the CEO of the area at Deutsche Bank that is running the fund "When you ask whether it's a bullish or bearish dollar play, it's neither. It's really a currency strategy."
DBV was down yesterday because the Riksbank in Sweden (a currency the fund is short) raised rates and the kroner went up. Also there was economic data from New Zealand (a currency the fund is long) that seemed to remove the possibility of another hike which hit the kiwi very hard.
There was another comment where the reader said he sees a correlation to the dollar and thinks the fund will be stuck with a long dollar which he thinks will be a negative. The fund has been out for a month. It is not clear to me that any correlation he sees will stand up. The length of the back test (which is not chartable that I know of on any website) takes in big moves for the dollar in both directions.
I think the better question is can an extreme move in the dollar have some sort of second derivative effect on the strategy. The dollar has not moved enough in the last month for this to come into play yet. What I mean is could a move in the dollar cause a distortion in the other G-10 currencies. I am not talking about the dollar going up or down vs. the yen, this should not matter according to the interview quoted above. But I wonder if a big lift in the yen vs. the dollar distort the cross rates of the yen vs. other currencies.
This all brings up an important idea. If you are going to own this fund, or any product really, you need to stay in touch with what underlies the fund. In the case of DBV it is, at a minimum, the goings on in the currencies it is long or short. This is not much different than keeping up with the goings on in a stock you own.
Keeping in touch with the currencies is not that difficult. You can subscribe to the Daily Pfennig, visit the web sites of the various central banks (every one I have ever looked at translates their site into English), I also read commentary from Jyske Bank, DailyFX, Bloomberg, blogger David Andrew Taylor, Brad Sester and Marc Chandler who among other things writes for RealMoney.com.
I don't think the average do-it-yourselfer needs to read this many different sources of forex every day but one or two to at least know when there will be central bank activity and a couple of big releases is doable and probably necessary.
Wikinvest Wire
13 comments:
Your elucidation is much appreciated!
Jay C.
When we ask our questions, masked as comments, some of us are going to have to get our dose of castor oil. I may be missing your true intent roger, but yeah like that's what we are doing as in trying to understand the underlying dynamics before buying a stock or fund. Of course only one month of data is a speck in the universe, but it's the speck we have to create possibilities. You've helped with the links and with the point that a long and a short went south, but while the fund is not intended, and this obvious, to be dollar sensitive, sometimes there are unintended consequences. From one of the links, it looks like to me the dollar has the third highest interest rate. It will stay a long candidate, if that indeed is the case, and as long as the dollar goes down the leveraged short is going to take a bite out of the nav. Not a big deal if it's just noise and fluctuation, and that is the question. Heck Roger, you take the effort to respond and share. I think we can handle a little IBS. Now, back to the expected sell off today.
my true intent was to update what I had written about earlier (my post from earlier this week was an update to past posts).
Subsequently more questions came in and I responded.
The fund does not take a position in ht edollar when it is one of the highest or lowest yielders per the funds' website which i linked to earlier this week.
Good info. Thanks Roger.
Roger,
You might want to check that website again; specifically the "Index Weights" page. As I understand it, the fund will not take a FUTURES position (long or short) in USD (so as not to profit or suffer loss in the "home" currency). However the dollar IS currently occupying one of the 6 "slots" in the fund. As such, I would think there would be some sort of impact on performance (as opposed to say GBP, for example, being in that slot instead).
That said, I do like the concept and have taken a small (so far) position myself for much the same reasons as you.
Ron
http://dbcfund.db.com/Dbv/weights.aspx
The fund is 1.66 long the dollar, even though it is going lower. I just talked to dbc. Roger, I appreciate your patience, even if stretched, but I take your last comment as believing they never go long or short the dollar. Must be a misunderstanding on my part here.
My comment is based on the quote I linked to in the post.
Also from the fund website
on the right hand side I paste the following;
"If the United States Dollar is one of the six currencies associated with the highest or lowest interest rates, the Fund will not establish a long or short futures position in USD because USD is the Fund's home currency and, consequently, the Fund cannot enjoy profit or suffer loss from long or short futures positions in USD."
Plot thickens with confusion?
Roger,
I don't think it's all that confusing. If USD is in the top or bottom 3, then apparently they just hold dollars (without leverage) in one of the slots.
The previous poster said they spoke to someone at DB but that info doesn't sound right. Perhaps they were misinformed or misunderstood. 1.66 x USD would imply leverage.
When the dollar is NOT one of the positions, the fund as a whole would be leveraged 2:1. Look at it this way . . . 6 positions X 2 or 12/6 = 2. If they are holding dollars, then only 5 positions are leveraged or 10/6 = 1.66 leverage. They explain this at the site. The above is just my own attempt at the math.
I don't know their reasons for doing it this way. Seems like it might have made more sense to ignore the dollar entirely but it is what is is.
+ If the United States Dollar is one of the selected six currencies, the Index will not enter into a futures position in USD because USD is the Index's home currency and, consequently, the Index cannot enjoy profit or suffer loss from long or short futures positions in USD
Even though the weighting table at the web site has the usd listed, it is null and void...not used in the actual purchase of contracts. The issue remains, why is this year a bad year so far, is there a dynamic that could persist into the future? Like Roger, I want to be clear if I'm going to be owning someting.
Yes, I was misinformed. The young, quite young, rep, clearly confirmed that the usd at 1.66 was a current holding. I called back to verify. Spoke to someone different, got a differnt, accurate answer. (Kind of like calling my insurance company)
One thing I do know, ahem, is that the Swedish krona and the Swissi (both short in the fund) are up against the Aussie and the Kiwi (both long in the fund) YTD.
I think Roger gave a perfectly clear explanation as to why the fund is off a bit lately. If the Swedish and Swiss currencies are strengthening while the Aussie and New Zealand Currencies are weakening or even just flat, then that's a negative for the fund as currently constituted. Same for the Yen (although I'm not holding my breath on that one). Keep in mind that the fund strategy is "self correcting" (albeit only on a quarterly basis). Also agree that if you don't understand how the fund would work, you probably shouldn't own it.
If you can make two posts with active comments on this fund and not use the phrase "carry trade," then you probably shouldn't own this fund. As I wrote on your seekingalpha crosspost of the initial note, "[c]arry works great, brilliantly in fact -- until it doesn't. What happens then is left as an exercise for the reader."
DBV is a mechanical, G10-basket carry fund that charges you 75bps a year for the privilege of making a couple futures trades for you. If you must have it, check DB's data page on occasion to see what you own. Right now it's long AUD/NZD/USD (USD as noted only implicitly), short CHF/JPY/SEK.
FD: I implicitly have been short the carry trade via long JPY/USD calls since early October, an awful trade until recently.
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