--BOC, BOE fuel trading on divergence in rate outlooks

--Canadian dollar, pound emerge as winners; Australian dollar, yen losers

--Some fund managers bet euro will be a loser as ECB may be forced to cut rates

--Still, some say it is premature to declare that a consistent rate-differential theme has emerged

 
   By Min Zeng 
   Of DOW JONES NEWSWIRES 
 

NEW YORK (Dow Jones)--Major central banks are showing signs of going separate ways, which could start to reinvigorate currency bets from those aiming to profit from a divergence in interest-rate outlooks.

Such traders will seek to buy currencies of central banks expected to be the first among their global peers to raise interest rates, or to sell currencies of those expected to be ahead of the pack in easing policy. Higher rates make a currency more valuable to hold.

Such rate-play bets, a mainstay of foreign-exchange-trading strategies, have been harder to employ in recent years as developed nations' central banks have almost universally adopted easy-monetary policies in the face of various challenges emerging from the global financial crisis. Concern over fallout from the euro zone crisis has also complicated the picture, with highly correlated markets moving according to shifts in risk appetites rather than interest rate differentials.

But rate-play opportunities have resurfaced, with the Bank of Canada last week signaling it may raise interest rates in coming months to tame inflation. Hot on the heels of that announcement, a policymaker at the Bank of England who had been an ardent supporter of accommodative policy stopped calling for more economic stimulus. These developments were seen as signals to buy the Canadian dollar and the British pound.

In contrast, bets against the Australian dollar and the yen have taken hold as those countries' central banks are expected to ease monetary policy in coming days.

Some fund managers have said it is premature to declare that a consistent rate differential theme has emerged, given the uncertainties over the euro zone's sovereign-debt crisis and the global-growth outlook. But the diverging views of central banks have nonetheless energized many to focus on these opportunities.

"Previously, central banks were all doing the same thing and it was only a matter of who is moving more aggressively," said Kathy Lien, director of currency research for the currency trading company GFT in New York. "Now, however, central banks are moving in different directions, providing more opportunities for investors."

The Canadian dollar has risen 0.6% versus the yen over the past week, bringing its gain this year to 9.2%. The pound has risen 1.3% versus the dollar over the past week, boosting its gain this year to 3.8%. The pound has rallied 9.6% versus the yen in 2012.

In recent trading, the Canadian dollar was 0.2% higher against the U.S. dollar at C$0.9889. The sterling was flat at $1.6133.

Euro bets surrounding the policy outlook of the European Central Bank are less clear-cut. And the uncertainty over whether the Federal Reserve will launch new stimulus measures or signal it is calling it quits might complicate bets on the direction of the U.S. dollar versus the euro and other currencies.

Matthew Cobon, fund manager at Threadneedle Investments in London, is betting currencies in North America--the U.S. dollar, the Canadian dollar and the Mexican peso--will rally versus the euro, since he expects the ECB will be forced to cut interest rates again as the euro-zone economy is mired in recession. But he cautioned, "we haven't really drawn a conclusive argument that the market is willing to drive exchange rates on that basis significantly."

Scott Ainsbury, who helps manage about $4 billion in currency in New York at FX Concepts Inc., said although some central banks will talk about tightening monetary policy, he doesn't expect "a race toward hiking rates" anytime soon.

There are too many uncertainties, he said, citing the euro-zone crisis, stock-market volatility and continued fears about the risk of a significant slowdown in China.

The counterpoint to that, however, is that inflation remains a risk, partly due to near-record-high oil prices. Central banks from countries most at risk in this environment may need to raise rates, which would drive up their currencies.

"The more important call is whether global inflation will stay higher than expected, which I think will be the case," said Stephen Jen, managing partner of London hedge fund SLJ Macro Partners LLP. "If so, then the super-dovish central banks will be forced to alter their stance."

(Min Zeng writes about global fixed income and currency markets for Dow Jones Newswires. He can be reached at 212-416-2229 or via email at: min.zeng@dowjones.com; @djfxtrader)

--Stephen L. Bernard contributed to this article.

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(END) Dow Jones Newswires

April 24, 2012 16:00 ET (20:00 GMT)

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