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ACPI International Bond comment - Dec 11
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Monday, 19 March 2012
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Fund Manager Comment
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Global markets responded positively, albeit in a muted fashion, following agreement for a second Greek bailout worth €130 billion. Existing bondholders agreed to waive 53.5% of principal in exchange for a lower coupon and longer dated bonds. The move will see Greece's debt to GDP reduced to 120% by 2020 from the current level of 165%. Whilst S&P declared that the deal was a default, from a credit default swap (CDS) perspective; the ISDA deemed that the restructuring would not trigger a CDS event.
Markets were also buoyed by a second round of LTRO financing. 800 banks took advantage of cheap three-year financing worth nearly €530 billion in order to ease funding pressures. The euro ended the month 1.84% higher at $1.3325 (US) whilst the S&P 500 gained 4.32%.
The Bank of England announced a further round of 'quantitative easing' worth £50 billion. However, the minutes of the policy meeting revealed that members were split on whether a larger stimulus was warranted or whether the BoE should pause in its QE programme. Meanwhile, the Bank of Japan announced an expansion of its asset purchase programme by ¥10 trillion ($130 billion). The move followed weaker than expected GDP data for the final quarter of 2011.
In his semi-annual testimony to Congress, Federal Reserve Chairman Ben Bernanke stated that the economy was continuing to grow, albeit that growth was 'modest and bumpy'. Chairman Bernanke suggested that employment prospects were improving, with the jobless rate well below 9.0%. However, many observers would argue that reduced unemployment rates were indicative of large numbers of workers giving up looking for work and therefore leaving the workforce. Investors looking for hints as to the timing and magnitude of a third round of quantitative easing were disappointed.
The Australian dollar endured political jitters as former Prime Minister Kevin Rudd challenged Labour Party leader and current Prime Minister Julia Gillard to a leadership contest. However, the move proved a damp squib as Gillard comfortably beat Rudd, easing fears of an Australian political power struggle. India's WPI inflation was reported at 6.6% year on year - below expectations. A moderation in inflation may allow the Reserve Bank of India to ease rates at the next Central Bank meeting on the 15th of March. Meanwhile, China reported a higher CPI figure (4.5% versus the 4.0% predicted) due to increased consumption during Golden Week. Higher inflation means that the Chinese authorities are limited in easing the bank reserve requirement to counter weakening demand for exports and a cooling property market.
The ACPI International Bond Fund returned 0.38% in February. By the way of comparison, the Citigroup WGBI 3-7 Year (Unhedged) Index declined by 0.87% over the same period. The portfolio adopted a defensive US dollar position in February, reducing non-dollar exposure to virtually nil following a strong decline in the currency. Consequently, the impact of FX positioning of the Fund contributed a marginal amount (+4bps) to the Fund's return. Riskier assets such as national champion corporates performed strongly, adding 41bps to the portfolio return. Tactical positioning in US Treasuries was an overall negative for the fund during the month. We were long treasuries into February and closed the position following a sell-off. A further pullback gave us the opportunity to add longer-dated bonds and this trade added 21bps to the end of February.
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ACPI International Bond comment - Sep 11
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Wednesday, 21 December 2011
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Fund Manager Comment
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September produced a month of extreme volatility as risk assets including credit were hit by renewed concerns about European sovereign debt. The Greek government introduced an austerity budget for 2012, which included a controversial property tax. The budget was designed to reassure IMF/EU/ECB inspectors that the country is making progress in order to secure an E8bn tranche of the previously agreed E110bn bailout. The German parliament agreed to bolster the European Financial Stability Fund from E250bn to E440bn, despite suggestions from the US regarding the use of leverage, an orderly Greek default at some point seems inevitable. Italy was down graded to "A" with a negative outlook by S&P citing economic weakness and the fragility of the government coalition which re-enforced European sovereign concerns. The inherent weakness of the US economy also weighed heavily on the market. The non-farms payroll number disappointed with the news that zero jobs had been created in August and that previous months were revised down. The Federal Reserve convened from the extended two-day meeting to announce the widely anticipated "Operation Twist" where the Fed would buy $400bn of 6 to 30 year securities and sell a corresponding amount of shorter dated issues. The move was designed to put further downward pressure on long-dated yields. The USD returned to safe-haven status and advanced versus major and emerging market currencies. The Dollar (DXY) Index enjoyed its strongest month of performance since October 2008 in advancing by 5.99%. The Euro shed 6.83% versus the greenback, Sterling declined by 4.10% whilst the AUD - a key risk indicator - fell from 1.0707 to 0.9662 (-9.76%). The ACP International Bond Fund returned 0.68% in USD terms. By the way of comparison, the Citigroup WGBI3-7 year Index (unhedged), which is the funds nearest comparison in terms of currency and duration exposure, declined by 2.72%. Our long-standing aversion to the Euro was a helpful decision as the currency declined on the back of sovereign concerns. The fund was positioned with very little non-USD exposure which was advantageous in relative terms to other funds and the Citigroup Index. However, towards the end of the month we took the opportunity to add to some currencies, which we believe to have very strong fundamentals such as the Indian Rupee, Singapore Dollar and Brazilian Real.
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ACPI International Bond comment - Jun 11
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Monday, 12 September 2011
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Fund Manager Comment
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All eyes were focused on Athens during June as a 2nd bail-out for the indebted economy was negotiated. Germany and France were at loggerheads over participation of the private sector i.e. would bond-holders be forced to accept a hair-cut. However, an agreement was reached which involves a "voluntary" private sector roll-over of maturing debt and new official aid packages. Following the deal, which crucially is still dependent on Greece implementing a swingeing package of austerity measures the Greek parliament duly voted in favour of such austerity measures and risk assets rallied on the news. Despite the crisis in Europe, ECB President Jean Claude-Trichet gave a strong hint at further monetary tightening when he used the expression 'strong vigilance' in relation to inflationary pressures at the June ECB meeting. In the UK the Monetary Policy Committee (MPC) statement was 'dovish' and cited 'downside risks' to the economy which has shown signs of weakness recently, particularly in the crucial services sector. The Federal Reserve downgraded growth forecasts for 2011 and 2012. The revised forecast for economic growth for 2011 was stated as between 2.7 and 2.9 percent when previous estimates had been between 3.1 and 3.3 percent. Fed chairman Ben Bernanke also played down the prospects of QE3 citing that deflationary pressures had eased. The end of June marked the end of the QE2 programme which acquired $600bn in Treasuries and other securities. US jobs data continued to disappoint - the non-farm payrolls for May was a below expectations 54K versus 170K expected. Excluding jobs created by the Department of Employments birth-death model, which reflects hiring and firing from small firms which are not part of the survey, the employment figures would have been negative. China ordered lenders to set aside more cash as reserves following inflation data which climbed to 5.5%. India, which is struggling to contain it's own inflation issues, hiked the benchmark rate by 50bps. India, which is heavily dependent on imported oil, saw inflation rise from 8.66% in April to 9.06% in May. The ACPI International Bond Fund returned 0.52% in June. Government bonds broadly sold off. The Citigroup World Government Bond Index declined by -0.11% in local terms with Bunds outperforming Treasuries and Gilts. The Citigroup WGBI 3-7 year index (unhedged) which is our best comparison in terms of duration and currency exposure, returned 0.41%. We added value with our favoured currencies which are centred on Asia. The Singapore Dollar, Malaysian Ringgitt and Chinese Renminbi all advanced versus the USD. We also added took profits on our Japanese Yen currency position.
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ACPI International Bond comment - Mar 11
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Wednesday, 25 May 2011
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Fund Manager Comment
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Following March's geo-political distractions, investors returned to the 'risk-on' trade with commodities, equities and non-dollar currencies all marked higher in the month. The S&P 500 added nearly 3% whilst the Goldman Sachs Commodity Index rallied +4.57%. A key 'risk' indicator in recent months has been the AUD and the Aussie currency rallied from 1.0329 to 1.0971 - a new high - following the announcement of buoyant export prices The ECB raised rates by 25bps in the move that was widely expected. Meanwhile, Portugal accepted a bail-out following the admission that the country had missed the 2010 budget targets. The bail-out, which is expected to cost EU tax-payers E90bn, failed to have the market impact of the announcements by Greece and Ireland and the EUR rallied despite the new bail-out and the persistence of rumours of a Greek debt restructuring. S&P affirmed the US governments AAA rating but changed the US outlook from stable to negative citing "very large budget deficits and rising government indebtedness". Bond yields briefly sold-off by 10bps following the initial announcement but bonds yields rallied from 3.47% to 3.29% during the month. S&P also changed the outlook for Japan to negative following the devastating earthquake in March which will further hamper economic growth in the already fragile economy. Chairman Ben Bernanke made history at a first post-meeting Q&A session. The meeting itself provided no time-table to raise rates and the dollar declined on the view that the zero interest rate policy would not end any time soon. The UK reported negative GDP growth in Q1 which offset the +0.5% rise in Q4. With UK consumer prices reported lower than expected, the Bank of England may hold on raising interest rates despite widening support amongst the monetary policy committee. The ACPI International Bond Fund returned +2.25% in April. In comparison the Citigroup WGBI 3-7 year index (unhedged) added 3.04%. The currency contribution of the fund return added 144bps whilst bonds (in local currency terms) added a further 81bps. We remain under-weight in the JPY, despite adding a 5% in position in February, and comparatively this would have hindered performance as the Yen, which represents approximately 1/3 of the index, strengthened by 2.37%. Over-weighting non-USD currency was the required strategy for investors as the dollar, represented by the DXY Index, declined by 3.85%. We are selective in our non-USD positions and good performance from favoured currencies such as RUB (12bps), CNY (+13bps), MYR (+12bps), TRY (+7bps) enhanced returns. The Singapore Dollar (SGD) position was a stand-out performer as the economy grew more than twice the pace economists expected (at an annualized rate of 23.5%). This prompted a re-evaluation of the SGD trading band and the currency rallied by nearly 3%. Fund exposure to SGD added 20bps.
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ACPI International Bond comment - Dec 10
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Monday, 28 February 2011
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Fund Manager Comment
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Riskier assets enjoyed a strong final flourish to the year as EU debt tensions eased and optimism grew regarding the prospects for a global economic recovery. US employers added fewer jobs than expected and the unemployment rate unexpectedly rose to 9.8% - the highest rate since April. However, some US economic data such as the November consumer spending, which increased by 0.4%, were interpreted as a sign that the US economy was on a sustained path to recover. In addition, President Obama agreed to extend Bush era tax cuts which will add further stimulus to the US economy. Bonds sold-off heavily during the month amidst a more optimistic outlook and on inflation concerns - the 10 year Treasury retreated from 2.80% to 3.29%. The S&P 500 enjoyed a 'Santa Claus' rally which added 6.12% to the index. The Euro advanced from November's sell-off to 1.3387 (+3.1%) whilst the Yen added 3.1%.
Concerns about Eurozone peripherals eased as Ireland's parliament voted to pass the country's $90bn EU/IMF bail out. The country also nationalised another bank, Allied Irish Bank, after the Irish government received the green light to add E3.7bn of capital to the embattled lender. Funding for other peripherals such as Portugal (which was downgraded by Fitch with a negative outlook) remains expensive and the new year will see further pressure on Portugal, Spain and possibly Italy.
The People's Bank of China raised rates for just the second time in three years and also unveiled a range of measures designed to keep inflation, which rose by 5.1% in November, in check. Inflation is emerging as an economic threat across the globe - the Bank of England reported inflation of 3.3% (considerably above the stated target of 2%) whilst German consumer prices rose by 1% in November- more than the previous 8 months combined. The problem is even more acute in emerging market nations such as India, where food prices rose 18.3% in the year to December the 25th, and Indonesia where inflation is running at nearly 7%. The inherent danger is the that many economies may be forced to tighten monetary policy in order to combat inflation before the economic recovery has really taken hold.
The ACPI International Bond Fund returned 1.03% in December. In comparison the Citigroup WGBI 3-7 year index (unhedged) added 1.55%. Relatively speaking, the structural under-weight position in the Yen (which advanced 3.10% vs the USD) detracted from performance but a return of 4.12% for the year maintains the IBF's since inception annualized return of 6% pa.
Currency was the main driver of the fund in December - we calculate, that in local currency terms, bonds declined by. 0.13% (-3bps), whilst currency added the balance of performance. However, with yields rising dramatically the shortterm duration nature of the fund, together with absence of any real credit risk, limited loses in the month when the government bonds in local terms slipped by 0.42%.
Our long exposure to NOK was the stand-out performer. The currency appreciated by nearly 7% versus the USD and fx positioning in this currency added a handsome 33bps. The related SEK added a further 24bps. Our CNY positioning added 6bps as China raised interest rates on Christmas Day which permitted appreciation of 1.12% versus the USD. We added further performance in INR (11bps), HUF (9bps), SGD (18bps). We lost 5bps on our exposure to the Turkish Lira, which declined by 2.6%. The Turkish authorities took the unusual policy step of lowering interest rates in order to flush out the 'hot' money even at the expense of domestic inflation and this policy had the immediate, desired effect.
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ACPI International Bond comment - Sep 10
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Tuesday, 9 November 2010
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Fund Manager Comment
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The month of September 2010 was a period marked by undistinguished economic data which prompted talk of a further round of 'quantitative easing'. On the expectations of further loose monetary policy the S&P 500 enjoyed its strongest September since 1939 and extended gains a further 8.8%. However, the beleaguered President Obama did announce a further $50bn infrastructure stimulus program but all eyes are on the 3rd November FOMC meeting after Fed Chairman Ben Bernanke expressed frustration at the rate of economic recovery and that the committee were 'prepared to take new steps if needed'. Europe suffered from a fresh round of sovereign debt fears with Ireland at the centre of the storm. The Irish government revealed the extent of the bail-out required to save the country's stricken banking system which amounts to 32% of GDP or E40bn. Ireland's CDS market widened in a move the was reminiscent of Greece during the eye of the Greek storm whilst Spain's sovereign credit rating was down-graded by Moody's. The shadow of unilateral fx intervention loomed over the bond markets as the Bank of Japan intervened in the Japanese Yen by selling the currency, which had been a leading performer year to-date to the detriment of the country's exporters. Fears were expressed of competitive devaluation by major currencies as economies seek to export their way out of the economic slump. In addition to Japan, Korea, Thailand, Brazil and Colombia all intervened in the currency markets to limit appreciation. The fund returned 2.5% during the month of September. Since the start of the year the fund is up 4.5%. The median return of the peer group over the same month was 3.3% and that since the start of the year was 4.5%.
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Fund Name Changed
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Wednesday, 25 August 2010
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Official Announcement
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The TriAlpha International Bond Fund will change it's name to ACPI International Bond Fund, effective from 25 August 2010
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TriAlpha International Bond comment - Jun 10
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Wednesday, 18 August 2010
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Fund Manager Comment
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Risk assets continued their downward trajectory: the S&P 500 lost a further 5.39% whilst the Shanghai Composite Index, which is seen as a clear barometer of risk assets, declined by 7.48%. Concerns regarding a slow-down in Chinese growth at a time when Europe faces a debt crisis and the US addresses a protracted recession weighed heavily on the markets.
There was short-lived excitement in the market, and a strong rally in Asian currencies, when it was suggested that the Chinese authorities would permit the Yuan to appreciate. However, the euphoria was temporary as it became clear that any appreciation would be modest and the process would be gradual.
US economic data remained very weak. Excluding the impact of temporary census worker US payrolls were anaemic whilst new home sales tumbled and retail sales were markedly negative (-1.2% versus a consensus estimate of +0.2%). Moody's credit rating, perhaps belatedly, downgraded Greece and this prompted Greece's exit from the major government bond indices. Investment managers, who were previously under-weight Greece debt, were forced to sell Greek bonds to avoid over-weighting the indebted southern European nation.
US Treasury 10 year yields declined from 3.28% to 2.93% as bond markets moved quickly to price deflation. At month end real yields on US TIPS stood at 1.06%. Sterling advanced strongly versus the USD amidst concern about inflation in the UK which prompted one member of the Bank of England's monetary policy committee to advocate a rise in interest rates. Sterling ended the month 2.8% higher at $1.4945. The euro also got some respite from selling as it bounced off a year low of $1.19 to end the month at $1.23.
During June the fund's unit price rose by 0.3% lagging the median return in the Lipper peer group by 0.5%. Fund return since the start of the year stands at -0.2% compared to a -3.1% return of the peer group. Fund return is in the top quartile over 3 and 5 years.
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TriAlpha International Bond comment - Sep 09
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Monday, 14 December 2009
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Fund Manager Comment
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US equities were buoyed by third quarter earnings, market watchers were looking for top-line sales growth as evidence of a revived economy and the earnings of Intel, Apple were strong whilst the major banks such as Goldman Sachs reported blockbusting results. However, economic data remained weak through October: US home starts disappointed and consumer confidence, as measured by the University of Michigan survey, came in below expectations. Unemployment remains a major concern and the US lost a further 263,000 jobs, taking the official unemployment rate to 9.8%.
US GDP improved at an annualised rate of 3.5% in the third quarter. However, this figure was largely influenced by discontinued stimulus packages such as 'cash for clunkers' and the new home credit. After a rally which greeted the GDP data, the S&P 500 shed 2.8% in the final session of October to finish the month down 1.97%. The US 10-year Treasury sold off as a result of the wave of bond issuance but ended the month strongly. Yields declined by around 20bps from the mid-month high to finish at 3.38% as the equity markets sold-off.
The UK economy unexpectedly contracted by 0.4% which sent gilts higher and the pound temporarily lower versus the dollar. The dollar weakened across the board, reportedly forcing export dependent South East Asian countries to intervene, as investor confidence in the green back diminished. The Australian dollar was boosted after the central bank lifted rates - becoming the first G20 nation to do so since the financial crisis began.Core holdings performed satisfactorily. We calculate a return of 'core' credit positions of 0.52% within the fund.
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TriAlpha International Bond comment - Jun 09
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Thursday, 13 August 2009
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Fund Manager Comment
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US bond markets experienced a volatile month with the 10 year yield rising to nearly 4% mid-month from 3.5% before returning to this level. The move was driven by inflationary concerns, rising commodity prices and fears that the Federal Reserve would begin a policy of interest rate increases as early as next year. Bonds sold off at the beginning of the month as US non-farm pay-rolls came in at -345 000 jobs lost in May versus a consensus estimate of -520 000. The news that 10 major US banks were given approval to exit the restrictive TARP having proven that they could raise money in the capital markets, was also a boost to equity markets. However, consumer confidence remained fragile and later in the month the view developed that bonds had been over-sold following weaker data and evidence of further declines in GDP in the US and the UK.
New issues continue to come to the market, albeit at a slower pace than earlier in the year. Oracle, Merck and Telefonica were amongst leading global companies to issue new debt in June. Credit spreads continued to tighten led by lower quality and longer-dated issues. The dollar was range-bound versus the EUR, maintaining a level of $1.4050 whilst Sterling strengthened slightly to $1.64. The Japanese Yen weakened marginally versus the dollar to 96.32 having fallen to 98.26 mid-month.
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TriAlpha International Bond comment - Mar 09
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Thursday, 11 June 2009
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Fund Manager Comment
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The Fund return is in the top decile over the last 1, 3 and 5 years.
April was an outstanding month for the risky asset markets and in particular the higher beta types. There were a number of key factors that helped drive both the Equity and Corporate bond markets (1) we saw "shoots" of improving economic data which indicated to the market the worst of the recession is over (2) the US government announced a number of new initiatives to support the banking sector, including PPIP (3) earnings beat expectations and in particular 1st Quarter returns for the financials (4) the extent of the risky asset underweight by the market was extreme.
While all these factors are positive in the short term, the long term health of the economy is still contracting, but just at a slower pace. While earnings improved, top line growth is still contracting. Financial earnings were impressive but entirely constructed through trading profits which will be difficult to reproduce. The long term diagnosis for the economic outlook is still far below trend growth for the foreseeable future. The economic headwinds are considerable and these will ultimately play a considerable part in the market psychology over the coming quarters.
Given the very conservative nature of the portfolio at this stage, the fund did not fully participate in the rally we saw recently. Overall we are happy with the performance to date. Government bonds had a poor month overall and given our high quality bias in the fund it was a drag on performance. There was no dramatic change in overall duration but we did take some profits on high beta currencies such as the Australian and Canadian Dollar. We expect the credit markets to be more difficult in the coming months and we believe we are well positioned for this.
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TriAlpha International Bond comment - Sep 08
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Friday, 14 November 2008
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Fund Manager Comment
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The international capital markets are experiencing unprecedented levels of panic as a consequence of a number of major financial institutions either going under or being rescued. Equity markets are highly volatile and investors have sought cover in the safety of short term government paper, sending risk premiums soaring.
Credit is very scarce and bank balance sheets are under extreme pressure. The yields on all corporate bonds rose during September sending spreads much higher than the levels we saw in 2002. Our portfolio is high quality but we did suffer from exposure to AIG (AA rated by S&P/Moody's). We sold the majority of our exposure at a loss prior to the rescue by the Fed. However, we also took advantage of wider spreads and added quality names such as Nestle, Unilever and Shell to the portfolio at attractive levels.
At the time of writing, the US and European authorities have put together a massive package to shore up the banking system and global central banks have taken part in a coordinated round of interest rate cuts to restore confidence and provide a boost to the global economy. Further substantial cuts look likely in coming months.
In September we reduced our currency exposure to the US Dollar, locking in profits after the rally from 1.60 to1.40 against the Euro. Currently, we prefer a more diversified strategy with a substantial allocation to defensive currencies (e.g. Yen and Swiss Franc) but we also added a small exposure to BRIC currencies which have been very weak.
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TriAlpha International Bond comment - Mar 08
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Thursday, 22 May 2008
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Fund Manager Comment
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While financial markets have stabilised somewhat, the real economy is clearly suffering because of the damage it is suffering from the bursting of the credit bubble. Three consecutive months of job losses in the US suggests that the recession has begun and unsurprisingly consumer sentiment is at a low ebb. Falling consumer expenditure, which equates to more than 70% of US GDP, will put more pressure on the real economy, both domestic and global. Therefore, in an increasingly globalised world, we see European economies following the same trend as the US, leading to lower rates by the year end.
We have added Malaysian Ringgit and Rouble currency exposures while increased the hedge of Australian Dollar exposure due to a slightly less hawkish statement by the RBA.
We have started to notice very attractive opportunities in the credit space and thus we have relaxed the credit quality of the fund. AAA content has fallen below 50% and we have bought names such as Vivendi (BBB), Diageo (A-) and McDonalds (A-). These companies have strong balance sheets and cash flows and their spreads now offer a decent pick up of yield over and above Government debt.
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TriAlpha International Bond comment - Dec 07
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Thursday, 3 April 2008
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Fund Manager Comment
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Economic indicators across all the Western economies are worsening. Therefore we see interest rates falling in 2008 across those markets as slowdown impacts the global economy. This appears to be fully priced into the US yield curve but much less so in Europe where expectations have not changed materially over the last 2 months. Inflationary pressures in the UK are easing thereby giving room to the Bank of England to cut rates.
Like we said previously, we have been increasing our position in Euro denominated fixed income securities. As at the end of December 2007 the largest position in the fund is short dated Euro bonds where we see some potential for yields to fall as rate expectations fall. However this position is accompanied with currency hedges as we do not like the Euro currency. We are building our USD exposure, both by hedging non-USD bond exposure and by allowing inflows to accumulate. Euro exposure is at its lowest since launch.
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TriAlpha International Bond comment - Sep 07
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Monday, 12 November 2007
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Fund Manager Comment
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The fund has performed consistently ahead of the peer group in 2007 and is ranked just outside the top 10% in the Lipper sector.
Since launch the fund has beaten the median by 1.3% p.a. Fund performance to date is equivalent to USD LIBOR +2.8%.
Risks appear to be on the downside for the US economy but we remain of the view that a soft landing is the most likely outcome as we are confident that the Fed will continue to cut rates if needed. Therefore with 10 year yields around 4.5% we retain a short dated portfolio as we see yields rising from here over time.
During the recent turbulence we took advantage of the weakness in the credit markets to move our Government holdings into high quality corporate names offering attractive yields. We have not yet been tempted to invest below A rated issues.
We also locked in gains on the Euro which had become a big exposure in the fund and which rose strongly as investors anticipated the next phase of easing by the Fed. For the time being we remain out of the Yen and Sterling.
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TriAlpha International Bond comment - Jun 07
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Thursday, 27 September 2007
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Fund Manager Comment
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Yields have moved up sharply in recent months. For some time we have talked about a fair value of around 5% for US Treasuries (based on 3% real + 2% inflation). Whilst we would prefer to be buyers of bonds when they are cheap, rather than just fair value, we are currently very conservatively positioned, so we took the opportunity to increase duration when yields reached 5.2%.
We also closed out our Canadian Dollar currency position after a useful rally against the major currencies. We opened the position back in February when the Oil price was languishing just above $50 (Canada has some of the largest Oil reserves in the world, 2nd only to Saudi). After the move above $70 we feel now is a good time to take profits.
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TriAlpha International Bond comment - Mar 07
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Monday, 28 May 2007
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Fund Manager Comment
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Current US Treasury yields are discounting easing of Fed rates (from 5.25%) over the coming months. Given that core inflation in the US remains above the Fed's comfort range of 1-2%, expectations of cuts in the short term may be too optimistic. Thus we remain comfortable holding short term issues. In the UK inflation has remained higher than desired, causing a more hawkish approach by the Bank of England.
Even though there was no rate hike in April, we may see further tightening in the near term, especially if the housing market remains strong. We think further rate hikes would lead to a slowing of the economy and so after a rise of 50bp in Gilt yields over recent months, we now see some value and have increased our allocation to GBP bonds to 15% of the fund, whilst hedging the currency. We also increased USD at the expense of EUR and JPY. This however was merely some short term profit taking - we have not turned bullish on the Dollar. We reopened the position in Canadian Dollars - the currency should perform better with a stronger Oil price.
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TriAlpha International Bond comment - Dec 06
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Tuesday, 13 March 2007
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Fund Manager Comment
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Rate cuts expectations peaked around the end of November. Since then, robust data and another set of hawkish FOMC minutes has seen yields rise again. This is in keeping with our expectations from last month. There would appear to be no rush for the Fed to cut rates and the next move could still be upwards. This is a major risk to bonds. Our currency calls during 2006 were mostly on the right side of the markets but the one negative was the exposure to the Yen which continued to lag. It is difficult to know when this trend will change but the huge volume in Yen carry trades makes the currency susceptible to sharp upward moves on any favourable macro news from Japan.
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TriAlpha International Bond comment - Sep 06
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Tuesday, 28 November 2006
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Fund Manager Comment
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The fund has recently reduced its exposure to the US Dollar in expectation of weakness from here. The Trade deficit appears to be deteriorating further and the Federal Reserve is very unlikely to increase rates in the short term, which means that interest rate differentials will narrow. Positions were taken in CAD and NOK in September to take advantage of the weakness induced by the fall of the Oil price. In terms of duration we are cautious at these levels and have reduced interest rate risk in US bonds where we think the market is priced for too pessimistic an economic outturn - we anticipate a soft landing.
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TriAlpha International Bond comment - Jun 06
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Wednesday, 16 August 2006
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Fund Manager Comment
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The fund performed in line with both index and peer group during June and we haven’t changed our views dramatically. We expect the Fed to pause soon and to see some economic slowdown during the second half in the US. Whilst yields are still below normal levels we now see some more value starting to appear in the US. Therefore we are currently in the process of increasing exposure to US bonds but on a currency hedged basis as we are not optimistic for the US Dollar. In other markets we continue to adopt a very conservative duration stance.
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TriAlpha International Bond comment - Mar 06
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Friday, 12 May 2006
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Fund Manager Comment
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The 'fair value' target for USD bonds is 3% real which would imply 5-5½% for the US 10yr Treasury. We are currently close enough to that target for us to remove the ultra defensive duration strategy that has been adopted for the past 2 years. In most other markets however we remain very cautious. European growth is picking up strongly which means that bond yields still have a way to go.
We have edged more exposure into the Yen and have removed Sterling exposure which has worked well in the short term.
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TriAlpha International Bond comment - Dec 05
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Monday, 13 March 2006
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Fund Manager Comment
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Yields have edged up over recent weeks. Higher Fed rates and further evidence that the US economy holding up well are the key drivers. In our view the US Consumer is a significant potential source of weakness in 2006 which should lead to a slower rate of economic growth and a ceiling to short rates between 4.5-5.0%. However given that real yields are so low, we still see upside potential for yields and so continue to adopt a conservative duration stance. The Dollar has been weaker so far in 2006, though evidence of robust growth could help it to gather strength again. Medium term we look for opportunities to diversify further into other currencies but we do not favour Sterling. By default whilst the ECB is in hawkish mode, the Euro could do well.
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TriAlpha International Bond comment - Sep 05
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Wednesday, 26 October 2005
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Fund Manager Comment
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The Fed's recent focus on inflation risks has got the bond market's attention and yields have edged up again after the hurricane dip. With real yields heading to zero (using headline inflation rates) we remain defensive. At some point however it seems inconceivable that we won't have some sort of growth slowdown in the months ahead. The question remains as to how this will affect Fed policy. Will rates continue rising due to inflation worries or will the Fed pause? And how will this affect Treasury yields? We prefer to err on the side of caution.
We are now reducing US Dollar exposure in favour of Asian currencies. Higher volatility in markets makes the chances of a sharp reaction against the Dollar on weaker data much more likely.
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TriAlpha International Bond comment - Jun 05
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Thursday, 1 September 2005
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Fund Manager Comment
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Performance Since Inception
Since inception (1st May 2003), the portfolio has returned 11.9%, slightly behind the S&P Offshore Global Bond Sector Median of 12.1% for the same period.
Fund Managers Commentary
Most commentators judged the revaluation of the Chinese Yuan as being of minimal significance due to its small scale and assurances that the Chinese Govt were unlikely to repeat the move anytime soon. However the reaction of both the US bond market and the US Dollar might imply that it could prove to be a critical turning point. At the margin the Asian banks will have less appetite for US Dollars and US Treasury bonds and therefore yields should back towards more 'normal' levels. Other bond markets will follow in direction.
The fund has a very short duration position and an average quality of AA+.
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TriAlpha International Bond comment - May 05
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Monday, 20 June 2005
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Fund Manager Comment
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Economic and political problems in Europe have led to falling bond yields and a weak Euro. The exposure to Euro in the portfolio is around 20%, half of what it was a year ago and half of that implied by the World index. Our move to reduce Euro exposure since last November has therefore added significant value.
Economic activity appears to be slowing much as was expected this year but the bond markets are pricing in more of a recession scenario with no allowance for upside surprises in inflation. So despite weak economic data in Europe we think that the 10 year yield at just above 3% is too low. This is a global characteristic and a function of excess saving in the Asian economies and risk aversion in the West.
Consequently we remain cautious. The fund has a very short duration position and an increasingly high average quality (average AA+). Our short term priority is to preserve capital as much as possible during what we think remains a difficult period for bonds.
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TriAlpha International Bond comment - Dec 04
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Wednesday, 26 January 2005
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Fund Manager Comment
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Our expectations for 2004 were for higher bond yields as the economic recovery gained momentum. The improvement in the US employment cycle in March-May led to a sharp spike in yields but prices rallied again through the Summer as a higher Oil price created uncertainty about the economic outlook. Yields then rose again towards the end of the year. Over the course of the year the US yield curve flattened considerably as Fed rates were increased and long yields declined. The fund has been cautiously positioned throughout the year, though it did take on some more interest rate risk in May as the 10yr US treasury approached 5%. This approach led to an average performance for the year compared to the S&P Global Bond peer group. Looking forward however we remain of the view that real yields need to rise from current levels and so expect our conservative stance to provide superior performance and more importantly safeguard our investors' capital in the meantime.
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TriAlpha International Bond comment - Oct 04
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Monday, 13 December 2004
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Fund Manager Comment
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Performance Since Inception
Since inception (1st May 2003), the portfolio has returned 13.9%, ahead of the S&P Offshore Global Bond Sector Median of 11.5% for the same period.
Fund Managers Commentary
Bond markets are currently focused on the slowing rate of economic growth in the US and falling inflation expectations. We however are concerned about the medium term effects of higher input costs (Oil and other commodities). A prolonged period of higher prices could lead to increases being passed on to the consumer. It is also a concern that this month's US Treasury auction will only go ahead providing Congress agree to raise the debt ceiling. The scale of borrowing by the US Government puts increasing strain on the US Dollar and could ultimately drive yields higher.
Therefore in the short term, we remain focused on preserving capital by staying in shorter dated bonds - the fund has an average life to maturity of only 1.7 years.
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TriAlpha International Bond comment - Sep 04
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Monday, 13 December 2004
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Fund Manager Comment
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Performance Since Inception
Since inception (1st May 2003), the portfolio has returned 11.2%, ahead of the S&P Offshore Global Bond Sector Median of 8.9% for the same period and in line with the Citigroup World Govt Bond Index (3-7yrs) which is up 11.4%
Fund Managers Commentary
Bond yields remain at lower levels than we think is appropriate, especially given the inflation risks from the recent run up in commodity prices. Our main issue with bond markets generally is that real yields (i.e. nominal yields less inflation) are very low and do not provide sufficient reward for investors. We would need to see an increase of at least 100bp on yield levels before feeling more comfortable.
Therefore in the short term, we remain focused on preserving capital by staying in shorter dated bonds - the fund has an average life to maturity of only 1.9 years.
We remain cautious towards the Dollar due to the extent of the deficits in trade and Government finances. The current 40% allocation to US Dollars is temporarily high and will likely fall in the near term.
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TriAlpha International Bond comment - Aug 04
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Friday, 17 September 2004
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Fund Manager Comment
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In recent months, markets have focused on the deceleration in economic growth in the US caused by higher interest rates and higher Oil prices. The best demonstration of this is the slippage in the ISM indices which have fallen from the 20 year peaks set recently. We note however that these indicators still point to further growth going forward and we do not expect a significant slowdown of growth.
The 10 year Treasury yield of 4.2% as being well below our definition of fair value which is 3% real. Assuming an inflation rate of 2.5% (current rate is 2.8%) that gives a fair value of 5.5% for the 10 year. Therefore we continue to take refuge at the short end of the curve where our holdings are much less sensitive to yield changes. This involves a cost to the fund in terms of a lower running yield but we would prefer to err on the side of caution for the time being.
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TriAlpha International Bond comment - Jul 04
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Wednesday, 25 August 2004
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Fund Manager Comment
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The recent softer economic data has pushed yields lower. In the meantime the Fed appears to be persisting with its 'measured' approach towards rate rises. We expect however the economy to remain fairly robust and so have shifted back to a more cautious duration stance (around 2.7 yrs). Markets do not seem to be pricing in the inflationary risk from much higher Oil prices and real yields look well below normal levels. Therefore we think capital is at risk in longer duration issues. We have also reduced the credit exposure in the portfolio by switching to high quality Government issues (now 40% of the portfolio). This reflects our view that credit spreads are about as tight as they can go and are therefore subject to risk of credit shocks, should they occur.
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TriAlpha International Bond comment - Jun 04
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Monday, 26 July 2004
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Fund Manager Comment
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The Fed increased rates by 25bp at the end of June as expected and reiterated its 'measured' approach to rate increases in the near future. Some softer economic data seen in the past few weeks makes this now seem a plausible policy and the inflation worry has dispersed somewhat, allowing the 10 year yield to drift back down to 4.5%.
After the excitement of the last few months, bond markets could be dull for a while but isolated pieces of stronger data could stoke inflation worries again so we would are remaining with a cautious duration policy. Some of the lengthening trades that we did in May now offer profit taking opportunites. We also have been gently raising the credit quality of the portfolio as there seems limited potential for spread tightening from here.
Our target yield on the 10 year for end 2004 is 4.9% so shortening trades will be appropriate if yields fall from here (4.5%).
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TriAlpha International Bond comment - Mar 04
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Friday, 21 May 2004
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Fund Manager Comment
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The employment data has changed the profile of expectations for interest rates in the US and will probably have a positive knock-on effect to consumer sentiment and boost Bush's re-election hopes. We now have the possibility that growth could surge again this year in the US. This shouldn't be a major surprise given the massive stimulus received and the normal lag of impact in the real economy.
This is all bad news for interest rates so the question remains 'when' and 'by how much' will rates rise. Bond markets will struggle to generate positive returns under this scenario. Therefore our strategy is minimise sensitivity to yields in the portfolio by keeping average duration low. We are also adding to performance with our currency overlays, including a small position in Yen which has been profitable to date.
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TriAlpha International Bond comment - Dec 03
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Thursday, 4 March 2004
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Fund Manager Comment
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Economic data from the US continues to be strong and TriAlpha expect rates to rise during the second quarter of 2004, contrary to expectations of many eminent strategists who expect rates to stay at 1% throughout the year. Inflation is currently stubbornly low but we expect it to pick up during the year and put more upward pressure on yields. TriAlpha's target is for the US 10yr yield to reach 4.75-5.00% by the year end, which if achieved will lead to very modest returns for medium dated bonds for the year. TriAlpha therefore stay in short dated bonds in order to preserve capital in the meantime. The US dollar has been very weak, making the chance of a short term rebound high, but TriAlpha would not be inclined to expect a sustained rally in the currency due to the scale of the twin deficits.
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