Do you have a view on “Huf-Puf”? Or perhaps you’re more interested in “Nokkie-Stokkie”, Kiwi-Aussie or any other of the popular foreign exchange trades that don’t involve the dollar.

Given the number of currencies in the world, non-dollar trades may not seem unusual. But the greenback is involved in almost 90 per cent of all FX trades and is so dominant that all non-dollar trades are known as crosses, regardless of the currencies involved. This suggests the raft of non-dollar trading ideas being touted could say something about investors’ feelings about the greenback as well as perhaps a new-found intrepidity.

“There is a sense of trying to get the ‘big dollar’ out of the way,” said David Bloom, currency strategist at HSBC, who believes the dollar’s rally has unsettled many investors. “It’s easy to go with a trend when you feel you understand it but I’m not sure the market is that comfortable intellectually with the dollar’s rise.”

Kamal Sharma, strategist at Bank of America, added: “There’s a lot of speculation as to what’s going on the with the dollar – whether it’s being driven by repatriation flows, or whether its Fed rate hike expectations. With crosses, investors are trying to take that noise out and go where they perceive value to be.”

One relatively common trade has been selling Swedish krona for Norwegian. An investor who sold the Swedish krona (Stokkie, in market slang) for Norwegian krone (Nokkie) at SKr1.0940 at the beginning of the year has seen the Nokkie gain to SKr1.23 and is sitting on a gain of about 11 per cent. Expectations for Norwegian growth and interest rate rises, plus muted inflation and low interest rates across the border have fuelled the trade.

Some investors in eastern Europe have preferred to play the Hungarian forint (Huf, in market slang) and its worsening budget deficit wrangles against its near neighbours than the euro, where trade is more influenced by the dollar than the Polish zloty is (resulting in“Huf-Puf”). The forint is managed within a trading band by the monetary authorities, but investors are betting that if the government delays euro entry, it could fall sharply.

Elsewhere, those buying the higher yielding Brazilian real against the Mexican peso would have gained 13 per cent this year. “Exotic crosses are a way of mitigating risk for some,” said Carlin Doyle, strategist at State Street. “A lot of people taking on emerging market risk are by default taking on some dollar or euro risk and there is interest in getting away from that and doing some different plays.”

Trading in the bigger emerging market currencies, such as the Turkish lira, Brazilian real and South African rand, is relatively liquid. Other currencies are less liquid but the more muted intra-day fluctuations can be part of the attraction compared with the dollar, which wobbles on every bit of news.

But given the dollar’s dominance of the FX market, most crosses are still a relatively marginal game and the rise in interest likely reflects rising interest in FX generally from speculative investors such as hedge funds and proprietary trading desks.

“Real money – mutual funds – don’t tend to play crosses, and corporates typically don’t since they’re already based in one of the majors,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. Although FX analysis has been a developing science since currencies floated in the 1970s, studies of the history and behaviour of more exotic crosses are still relatively sketchy, leaving fertile ground for intrepid hedge funds interested in getting away from the herd.

But there are still caveats.

“Watch the liquidity” cautioned Mr Chandler. “If you’re long won, short yen, you should know that Korea doesn’t trade much in the US market so you can get out, but it’ll come at a price.”

Moreover, such is the dollar’s reach that it affects all sorts of side currency bets.

Mr Sharma warned: “The dollar still has something of a knock-on effect on all currency pairs. For example, if euro-dollar falls, Aussie-Swiss tends to rise – even people trying to insulate themselves with crosses can’t ignore the dollar.”

Copyright The Financial Times Limited 2018. All rights reserved.

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