Currency markets experienced some volatility in July but without much to show for it in the end. The winner was the Japanese yen, which became more attractive in relative terms as global bond yields melted down, diminishing its chronic interest rate disadvantage.
Meanwhile, the British pound posted a comeback to end the month higher as expectations for a hawkish shift by the Bank of England overpowered concerns around the Delta outbreak. The euro was little changed despite the ECB locking itself into negative rates for longer. That was also true for the dollar, after the Fed signaled that rate increases are still far away.
Finally, gold prices managed a decent recovery, drawing power from real US yields hitting new record lows. July was a drawdown month for the Fund, suffering losses and ultimately reducing the NAV. Although there were various reasons for that, the most predominant one was the sharp sideways movements in the market which caused small but consecutive losses after the second half of the month. These sideways movements were exaggerated due to the lack of liquidity during the summer month, leading to price movements without an underlying basis (apart maybe from some minor news releases in certain cases) causing them to be short lived and erratic.
The effect of these atypical market dynamics had a result of providing misleading signals to our models, ultimately mispositioning our strategy in the market. Although such drawdowns happened in the past and are expected as a performance correction, our efforts are continuous in minimizing the magnitude and duration of them.
The Fed sent shockwaves through financial markets in June, after it projected faster rate increases and signalled that a decision to dial down asset purchases may be looming. That breathed life back into the dollar as investors started to position for an eventual withdrawal of cheap money. Paradoxically, this also helped the yen.
With the Fed signalling a step on the brakes, the bond market priced out some inflation risk, pushing long-dated Treasury yields lower and boosting the rate-sensitive yen. Meanwhile, the pound fell after the Bank of England hesitated to provide normalization signals of its own, though it still managed to outshine the euro.
Finally, gold was one of the biggest fatalities of the Fed’s hawkish turn, suffering at the hands of a stronger dollar and fading inflation fears. The IXI Fund reached a new high watermark in June. Overall, the strategy was assisted by the volatility that followed the Fed announcements which caused robust price movements on certain traded instruments.
Moreover, some weak signals towards the end of the month, were counterbalanced by overall reduced trading costs due to increased market liquidity, thus reducing any potential losses and leaving the accumulated gains mostly unaffected.
The British pound was the star performer of the FX markets in May as the Bank of England took a baby step towards ending its quantitative easing program and as the UK economy is reopening. The euro rose in sympathy, boosted by some encouraging economic data and as the Eurozone is finally catching up in the vaccination race. In America, inflation started to heat up, but the Fed continued to resist calls for scaling back its enormous asset purchase program. That combination pushed real US yields back down and in turn, torpedoed the dollar. But depressed real yields and a sinking dollar is the perfect elixir for gold, which capitalized on this environment to recover all its losses for the year. The Fund’s strategy performed well during May, achieving all-time highs during the month but some losses during the end caused the NAV to drop just below the high watermark. Nevertheless, the algorithms performed and managed to offset most of April’s losses, thus increasing the Fund’s NAV.