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Hasenstab on the big yen-dollar arbitrage opportunity

Hasenstab on the big yen-dollar arbitrage opportunity

Franklin Templeton’s Michael Hasenstab is playing the arbitrage opportunity between an increasingly weak yen against a strengthening US dollar.

The manager of the £31 billion Templeton Global Bond fund has taken aggressive positions in both currencies.

‘We expect the Japanese yen to depreciate, and the yen versus the dollar is one of the areas where we’re seeking to add alpha. One of the core components of our currency strategy is long the US dollar, short the Japanese yen,’ he said in an investor update.

The US dollar is currently the dominant currency in Hasenstab’s largest fund, making up 61% of overall exposure compared with an index weighting of 36%.

This compares with a significant underweight in the Japanese yen, where he is using offset derivatives and other instruments to hold negative exposure of -24.9%.

BOJ policy play

Explaining the rationale for this move, Hasenstab said Bank of Japan policies were currently in place which offset concerns about Fed tapering and laid the groundwork for his currency play.

‘Even though the Fed has started to taper, at the same time the Bank of Japan (BOJ) is embarking upon a massive amount of quantitative easing,’ he said.

‘So while the Fed will not likely print an additional trillion dollars, the BOJ is in the process of printing the equivalent of an additional trillion-plus US dollars.’

Given this policy, Hasenstab expects the amount of global liquidity to remain adequate to support capital flows and sustain a wider global recovery.

‘We have a pretty clear idea that the Fed will be tapering; that it will be backing off of excessively easy policy. That being the case, we are not particularly concerned that Fed tapering is going to create a global crisis, especially since the BOJ appears to be moving to offset the Fed’s reductions.'

On the defensive

Overall Hasenstab described his positioning as ‘very defensive’ with regards to the rising rates environment.

‘We are actively allocating across different currency markets to potentially generate positive returns in an environment where interest rates go up,’ he said.

‘We are looking for opportunities to earn a decent yield without taking a lot of interest rate risk. We think countries like South Korea and Mexico, with strong underlying fundamentals, are places that may offer a solid and positive real yield without taking a lot of interest rate exposure.’

South Korea is currently the largest country allocation in the Global Bond fund, making up 15.4% of geographic exposure, while Mexico is the fifth biggest country bet (10.7%).

The Templeton Global Bond fund has returned 12.6% in US dollar terms over the three years to the end of March 2014. This compares with a rise of 5.96% by its Citywire benchmark, the JP Morgan Global GBI Unhedged TR, over the same period.

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