Volatility was a Bank’s Friend During Q1 as FX Trading Flourished

Forex trading has been an unloved division of banks during the height of the extended bull market, but the volatility resulting from the coronavirus pandemic has become a bank’s best friend during the first quarter. Forex trading divisions flourished despite a tumultuous Q1.

“The four biggest banks on either side of the Atlantic accrued nearly $29 billion in revenue from trading bonds, currencies, commodities and equities in the first quarter — up by a quarter from a year ago,” a Reuters report noted. “Equity trading and bond sales were exceptionally strong at most banks, but March-quarter revenue growth also came from an asset class that for years dragged on profits — foreign exchange.”

“Banks usually group FX under the broader umbrella of FICC — fixed income, currencies, commodities — so it can be hard to deduce its exact share of in revenues,” the report added. “But data from research firm Coalition shows currency trading revenues at the top 12 banks globally hit a decade-high in the January-March quarter.”

An interesting all-world play that hedges against currency fluctuations against the U.S. dollar is the Xtrackers MSCI All World ex U.S. Hedged Equity ETF (DBAW). DBAW seeks investment results that correspond generally to the performance, of the MSCI ACWI ex USA US Dollar Hedged Index.

DBAW uses a “passive” or indexing investment approach, seeks investment results that correspond generally to the performance, of the underlying index, which is designed to track the performance of equity securities in developed and emerging stock markets while mitigating exposure to fluctuations between the value of the USD and the currencies of the countries included in the underlying index. It will invest at least 80% of its total assets in component securities of the underlying index.

ETF traders looking to play dollar moves can look to funds like the Invesco DB US Dollar Bullish (NYSEArca: UUP) or the WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU). UUP tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.

On the other hand, the actively managed USDU tracks the USD against a broader basket of developed and emerging market currencies, including China, India, South Korea, Switzerland, Australia, Mexico, the United Kingdom, Canada, Japan, and Europe.

USDU provides investors with

  • a broad, dynamic, and effective way of gaining exposure to the U.S. dollar against a basket of foreign currencies in an ETF structure.
  • an alternatives bucket as a broad-based diversifier as it exhibits strong negative correlations to international equity and bond portfolios.

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