| Euro trade weighted index |
| Source: Deutsche Bank |
Deutsche Bank has launched a set of tradeable foreign exchange indices, with new products that make it simpler for clients to take positions on individual currencies.
The indices track one currency against a basket of others. These kinds of products are generally structured individually and sold over the counter, but the new tradeable indices are designed to make pricing and yield more transparent. If an index rises by, say, one point over a given period, the client makes one point on the investment.
“Clients look at the world and they form a view that, say, Europe is looking good,” explains Rob Mandeno, the bank’s global head of forex forwards trading. “But if they are going to trade that, they have to decide which currency will be on the other side of that trade – it is a two-decision process. But mostly they have only made one decision. In an index format they can now make one decision to buy Europe versus a basket of currencies.” Clients can use them to take positions in the US dollar, the euro, yen, sterling, Swiss franc, Canadian dollar, Australian dollar, New Zealand dollar, Swedish krona, and Norwegian krone.
Those other currencies are weighted according to the profile of currencies that dominate the base currency’s import and export partners. However, only a small group is used. “Central banks can have a large number of currency pairs in their trade-weighted indices and that becomes impracticable to trade,” says Mandeno. “We have created a proxy that is very highly correlated but with only five or six currencies.”
Mandeno says that clients have indicated that they would be more interested in following trade-weighted indices than, say, indices based on foreign direct investment or cross-border equity flows. “The nice thing about what we have chosen is that this is how the central bank views its own currency,” he says. “Therefore, in terms of monetary policy, correlation with interest rates and in terms of what is fundamentally important, this model is most representative of the thinking behind the people that count.”
More broadly, this move demonstrates how rapidly forex is becoming an asset class for hedge funds and institutions. It also highlights the fact that at the moment there is no dominant bank in forex indices, unlike the established reputation that Lehman Brothers and JPMorgan have in fixed income, MSCI has in equities and Goldman Sachs has in commodities. Deutsche Bank is trying to become the dominant player in forex.
