Views: Use and abuse

There are several different types of investment managers in foreign exchange markets, including the major players who use fundamental strategies, technical strategies and volatility-based (or options replication) strategies. The size of the trade that they will enter into relative to their benchmark is also normally a reflection of the degree of confidence in that respective move. Therefore, whenever a currency overlay manager deviates from a benchmark (regardless of style), the nature of currency trades implies an implicit view on currency levels. In this paper, we look at the views implied from some hypothetical positions of four types of managers: risk-controlled, technical, fundamental and mixed. This allows us to evaluate whether the resulting implied views are consistent with the directional bets those managers take with respect to their benchmark. Overlay managers and clients need to do such analyses to make sure that their portfolios are appropriately aligned. We find that the absence of a position is not always equivalent to the absence of a view, and that a short position implies a bullish view on that currency in a portfolio setting, because of the presence of correlation among exchange rates. Additionally, the size of a position need not equate to the magnitude of a view in a complex multi-security portfolio.