Currency Strategies Research Articles

Integrated Approach to Currency Factor Investing

Using the G10 universe of currencies, we evidence that parametric portfolio policies can help guide an optimal currency strategy when tilting towards cross-sectional factor characteristics. While currency carry serves as the main return generator in this tilting strategy, the two characteristics momentum and value are implicit diversifiers to potentially balance the downside of carry investing in flight-to-quality shifts of FX investors. Drawing insights from a currency timing strategy according to time series predictors, we further examine the parametric portfolio policy's ability to mitigate the downside of the carry trade by incorporating an explicit currency factor timing element. This integrated approach to currency factor investing outperforms a naive equally weighted benchmark as well as univariate and multivariate parametric portfolio policies.

Pass‐through to export prices: Evidence from Australia†

AbstractAustralia is a leading exporter of primary and agricultural commodities like iron ore, coal, wool and beef. Industry stakeholders point out that exchange rate fluctuations remain a key determinant of export revenue. This article investigates the exchange rate pass‐through to export prices using the recently proposed impulse responses by the local projections technique. Employing export prices in all destination markets and trade‐weighted exchange rates, there is substantial evidence that 17 SITC industry and sub‐industry level prices experience moderate to high exchange rate pass‐through to export prices. These industry categories include sectors like minerals and natural resources products, which are homogenous in nature, and Australia enjoys a comparative advantage in the export of such goods. However, this competitive edge does not necessarily lead to higher export prices, as currency invoicing plays an important role in determining the extent of the pass‐through effect. Our findings have important policy implications, especially regarding the invoicing currency strategy for exporters selling homogenous items.

An Anatomy of Currency Strategies: the Role of Emerging Markets

An Anatomy of Currency Strategies: the Role of Emerging Markets

An Anatomy of Currency Strategies: The Role of Emerging Markets

An Anatomy of Currency Strategies: The Role of Emerging Markets

A credit-based theory of the currency risk premium

This paper uncovers a novel component for exchange rate predictability based on the price difference between sovereign credit default swaps denominated in different currencies. This new forecasting variable – the credit-implied risk premium – captures the expected currency depreciation conditional on a severe but rare credit event. Using data for 16 Eurozone countries, we find that the credit-implied risk premium positively forecasts the dollar-euro exchange rate return at various horizons. Moreover, a currency strategy that exploits the informative content of our predictor generates substantial out-of-sample economic value against the naïve random walk benchmark.

Currency Momentum: An Emerging Market Issue?

Three main currency strategies have been established in the literature: carry, value, and momentum. We investigate momentum using data on 27 currencies (10 developed countries and 17 emerging markets). We find that momentum returns are driven by emerging market currencies, while the currencies of developed countries have no impact. An emerging market- specific dollar risk factor can partly explain these momentum returns. We carry out permutation tests and find support for our hypothesis that momentum returns are driven by emerging markets. However, we show that transaction costs reduce momentum returns considerably. We also show that the returns are time-varying and have been unattractive recently. The implications of this study for financial practitioners are to focus on emerging market currencies and optimise transaction costs when executing momentum strategies.

Practical Applications of Emerging Market Diversification Benefits: Stock Funds versus Currency Funds

1. Leonard L. Lundstrum 1. is a professor of finance in the College of Business at Northern Illinois University in DeKalb, IL. (llundstrum{at}niu.edu) In [ Emerging Market Diversification Benefits: Stock Funds versus Currency Funds ][1], from the Fall 2021 issue of The Journal of Wealth Management , Leonard Lundstrum of the College of Business at Northern Illinois University analyzes an investable emerging market currency strategy. He concludes that adding an emerging market currency fund to an otherwise well- diversified developed market portfolio adds an incremental diversification benefit. Adding emerging market equities to the same portfolio fails to achieve a similar benefit. [1]: https://doi.org/10.3905/jwm.2021.1.140

Enhancing Cross-Sectional Currency Strategies by Context-Aware Learning to Rank with Self-Attention

The performance of a cross-sectional currency strategy depends crucially on accurately ranking instruments prior to portfolio construction. Although this ranking step is traditionally performed using heuristics or by sorting the outputs produced by pointwise regression or classification techniques, strategies using learning-to-rank algorithms have recently presented themselves as competitive and viable alternatives. Although the rankers at the core of these strategies are learned globally and improve ranking accuracy on average, they ignore the differences between the distributions of asset features over the times when the portfolio is rebalanced. This flaw renders them susceptible to producing suboptimal rankings, possibly at important periods when accuracy is actually needed the most. For example, this might happen during critical risk-off episodes, which consequently exposes the portfolio to substantial, unwanted drawdowns. The authors tackle this shortcoming with an analogous idea from information retrieval: that a query’s top retrieved documents or the <i>local ranking context</i> provide vital information about the query’s own characteristics, which can then be used to refine the initial ranked list. In this work, the authors use a context-aware learning-to-rank model that is based on the transformer architecture to encode top/bottom-ranked assets, learn the context and exploit this information to rerank the initial results. Back testing on a slate of 31 currencies, the authors’ proposed methodology increases the Sharpe ratio by around 30% and significantly enhances various performance metrics. Additionally, this approach also improves the Sharpe ratio when separately conditioning on normal and risk-off market states.

World Digital CurrencyandTobacco Regulatory Science New Paradigm

Objectives: Based on the times analysis, we proposethe world digital currency, proposesthe world digital currency tentative plan. The so-called world digital currency is may distribute one kind of world digital currency, or as its initial digital nationality currency, as well as its initial other form like company or personal digital currency. Then has analyzed the digital currency competition, pointed out the digital currency the competition, is take the national digital currency strategy competition as the foundation, must formulate the good national digital currency strategy, at last we put forward thenew tobacco regulatory science paradigm.

Pricing ethics in the foreign exchange market: Environmental, Social and Governance ratings and currency premia

We examine the cross-sectional predictive ability of the Refinitiv Environmental, Social and Governance (ESG) score for returns in the foreign exchange market, using ESG scores aggregated at the national level, and find that ESG is a strong negative predictor of currency returns. Intuitively, investors require a premium for financing low-ESG countries while high-ESG countries offer lower returns and provide a hedge in the bad state of the world. We show that ESG is priced in the cross-section of currency returns. We also consider the different components of ESG and show that its predictability is driven by the environmental pillar of the ESG ratings. Our results have strong implications for portfolios of individual investors and fund managers and offer new insights for policymakers in the foreign exchange market. The profitability of the ESG currency strategy is not driven by the carry trade and is robust to transaction costs.

Pricing Ethics in the Foreign Exchange Market: Environmental, Social and Governance Ratings and Currency Premia

In this paper, we examine the cross-sectional predictive ability of the Refinitiv Environmental, Social and Governance (ESG) score for returns in the foreign exchange market, using ESG scores aggregated at the national level, and find that ESG is a strong negative predictor of currency returns. Intuitively, investors require a premium for financing low-ESG countries while high-ESG countries offer lower returns and provide a hedge in the bad state of the world. We show that ESG is priced in the cross-section of currency returns. We also consider the different components of ESG and show that its predictability is driven by the environmental pillar of the ESG ratings. The profitability of the ESG currency strategy is not driven by the carry trade and is robust to transaction costs.

УПРАВЛІННЯ ВАЛЮТНОЮ ДІЯЛЬНІСТЮ БАНКІВ В УМОВАХ НЕВИЗНАЧЕНОСТІ

The current foreign exchange activity of the bank takes place in conditions of economic uncertainty. Uncertainty means functioning in an economic environment that is constantly changing and complicated by a large number of factors. These factors are difficult to predict. The effect of uncertainty on the foreign exchange market is a consequence of sharp fluctuations in exchange rates. Currency fluctuations provoke an increase in the level of risks and unpredictable changes in financial results in banks. Therefore, managing the foreign exchange activities of banks is a complex process and requires financial managers to make effective management decisions. It is established that the state of the foreign exchange market determines the conditions of banks in it. A retrospective analysis of the dynamics of the foreign exchange market of Ukraine was conducted. In 2014-2015, the foreign exchange market developed under the influence of destructive factors. During this period, the hryvnia exchange rate devalued. Therefore, the NBU has applied a number of administrative measures. In 2016, the process of stabilizing the hryvnia against the US dollar began. In 2018–2019, the hryvnia exchange rate strengthened. However, the COVID-19 pandemic has changed trends in global commodity and financial markets. The influence of these factors changed the exchange rate trend in the foreign exchange market in Ukraine. The hryvnia devalued against the US dollar in 2020. In 2021, the exchange rate gradually stabilized. It is established that failure of banks to take into account the influence of these factors contributes to the growth of risks and deterioration of financial results. Therefore, it is important to create a system of management decisions in conditions of uncertainty. Such a system should consist of preventive and reactive measures. Preventive measures include the development and implementation of a set of solutions that will prevent possible threats. Reactive measures are formed when problems arise. These measures are formed at the expense of internal reserves and/or attraction of resources from external sources. If these measures do not work, the bank must change its currency strategy.

Effects of a Mobile App Called Quittr, Which Utilizes Premium Currency and Games Features, on Improving Engagement With Smoking Cessation Intervention: Pilot Randomized Controlled Trial

BackgroundNumerous mobile health (mHealth) apps have been developed to support smokers attempting to quit smoking. Although these apps have been reported to be successful, only modest improvements in the quit rate have been measured. It has been proposed that efforts to improve user engagement and retention may improve the quit rate further. Owing to the high cost of smoking-related disease, it is considered worthwhile to pursue even small improvements.ObjectiveThe aim of this study was to test a novel smartphone app that leverages premium currency strategies developed by the mobile games industry in an attempt to improve engagement and retention with a smoking cessation intervention.MethodsWe designed and developed a smoking cessation app called “Quittr” in line with previously developed smoking cessation mHealth apps. In addition to this established framework, we added a stand-alone fully featured city-building clicker-style game called “Tappy Town,” and a premium virtual currency called “QuitCoins.” The user earns QuitCoins for using the app in a way that contributes positively toward their quit attempt, and they can redeem these coins in Tappy Town for bonuses. To establish whether these features improved engagement and retention, we ran a 5-month randomized controlled trial where the intervention group had the full app with the extra games features, while the control group had the standard app only. Recruitment was performed via web-based advertising. Participants (N=175) had no direct contact with the researchers or other support staff.ResultsNo significant differences in terms of engagement, retention, or smoking outcomes were found between the control and intervention groups. However, survey data indicated that the majority of the participants valued Tappy Town (10/17, 59%) and the QuitCoins rewards system (13/17, 77%). Usage data also suggested that Tappy Town was widely played and was generally appealing to users (mean total time spent in app, control group: 797 seconds vs intervention group: 3502 seconds, P<.001). Analysis of the results suggests that users in the intervention group may have been negatively affected by the aspects of the chosen design, and some theories were explored to explain this unexpected outcome.ConclusionsAlthough the novel features of the Quittr app failed to improve the key outcomes measured in this study, there were enough positive indications to warrant further exploration of the concept. Additional research will be required to identify and correct any design flaws that may have adversely affected our participants before a follow-up study can be completed.Trial RegistrationAustralian and New Zealand Clinical Trials Register ACTRN12617000491369; https://www.anzctr.org.au/Trial/Registration/TrialReview.aspx?id=372661&isReview=true

Cross-Border M&amp;amp;A and Currency Returns

We uncover a novel source of currency return predictability stemming from cross-border merger and acquisition (M&A) activity: abnormally large M&A inflows lead exchange rate appreciations, while depreciations follow unusually large M&A outflows. We show that a simple cross-sectional currency strategy exploiting this predictability generates a Sharpe ratio of over 0.70 and is orthogonal to existing currency strategies. The portfolio weights are found to coincide with local extremes in macroeconomic fundamentals: countries experiencing the largest abnormal M&A outflows are growing most above their economic growth trend - a pattern that reverses following portfolio formation - while the opposite reversal in macroeconomic fundamentals is observed in countries experiencing unusually large M&A inflows.

Implied volatility term structure and exchange rate predictability

This paper provides empirical evidence of the predictive power of the currency implied volatility term structure (IVTS) for the behavior of the exchange rate from both cross-sectional and time series perspectives. Intriguingly, the direction of the prediction is not the same for developed and emerging markets. For developed markets, a high slope means low future returns, while for emerging markets it means high future returns. We analyze predictability from a cross-sectional perspective by building portfolios based on the slope of the term structure, and thus present a new currency trading strategy. For developed (emerging) currencies, we buy (sell) the two currencies with the lowest slopes and sell (buy) the two with the highest slopes. The proposed strategy performs better than common currency strategies – carry trade, risk reversal, and volatility risk premium (VRP) – based on the Sharpe ratio, considering only currency returns, which supports the exchange rate predictability of the IVTS from a cross-sectional perspective.

A Credit-Based Theory of the Currency Risk Premium

This paper extends Kremens and Martin (2019) and uncovers a novel component for exchange rate predictability based on the price difference between sovereign credit default swaps denominated in different currencies. This new forecasting variable - the credit-implied risk premium - captures the expected currency depreciation conditional on a severe but rare credit event. Using data for 16 Eurozone countries, we find that the credit-implied risk premium positively forecasts the dollar-euro exchange rate return at various horizons. Moreover, a currency strategy that exploits the informative content of our predictor generates substantial out-of-sample economic value against the naive random walk benchmark.

Bitcoin-based triangular arbitrage with the Euro/U.S. dollar as a foreign futures hedge: modeling with a bivariate GARCH model

This paper proposes a bitcoin-based triangular arbitrage, combining foreign exchanges in the bitcoin market and reverse foreign exchange spot transactions. An FX futures contract is used to reduce exposure to risk as a hedging instrument. The returns of the portfolio are jointly modeled using a bivariate DCC-GARCH model with multivariate standardized student's t disturbances due to the presence of leptokurtosis and fat tails observed. Based on the time-dependent covariance matrix, a dynamic optimal hedge ratio is formed, with a conditional correlation series as a by-product. Empirical results are obtained using Euros and U.S. dollars over the period from 21 April 2014 to 21 September 2018. Multiple rolling one-step-ahead forecasts are generated. The empirical results present bitcoin-based currency strategies dominate bitcoin trading in terms of risk management.

China’s economic strategy in Asia

PurposeThe purpose of this paper is to study key economic strategies in Asia laid out by the Chinese Government since Xi Jinping became the General Secretary of the Central Committee of the Communist Party of China.Design/methodology/approachThe paper is composed of six parts. The first part analyzes China’s Asian trade strategy with a focus on the free-trade agreement. The second part elaborates the Asian finance and currency strategy with the core being the regionalization of RMB. The third part introduces China’s newly proposed Belt and Road Initiative (B&R). The fourth part deals with the China–USA economic relationship with a view to China’s economic strategy in Asia. The fifth part explains China’s domestic economic policy which forms the basis of the Asian Economic Strategy.FindingsA marked change has taken place in China’s economic strategy in Asia, namely, giving more consideration to how to offer more public goods to the region. This is natural as China’s economic power is developed to a certain level and it is highly related to China’s attempt to growing its economic influence in this region. China believes that the B&R Initiative and Asian Infrastructure Investment Bank are both public goods China has provided to Asia. China’s economic strategy in Asia demonstrates that China, as a rising power, though faced with domination of established power and the original regional economic rule system, still promotes the cooperation, integration, participation and development of this region. In general, China’s economic strategy in Asia offers an alternative for countries in this region so that Asian countries can better safeguard their rights amid China–America competition, and a new Asian economic order can be better built.Originality/valueThe paper contributes to the researched area of China’s economic strategy in Asia by comprehensively elaborating its trade, money, B&R Initiative and so on. This paper also shows the major challenges of China’s economic strategy in Asia and therefore is helpful to fully understand China’s economic statecraft.

Currency strategies based on momentum, carry trade and skewness

This paper documents that momentum, carry trade, and skewness strategies do not contain exactly the same information, which inspires us to construct a novel, triple-screen strategy and test its profitability. We first investigate the properties of payoffs to the above three currency speculation strategies. We then conduct double sorting and cross-sectional regression analyses to disentangle these strategies and find that they are not completely overlapping. Finally, we combine the momentum, carry trade, and skewness strategies to create a triple-screen strategy. The results show that triple-screen strategies generally perform better than single- and double-screen strategies. Our empirical findings are also robust to subsamples (advanced, emerging, non-Euro and Group of Twenty economies). Our research findings provide experimental investigation on the effectiveness of combining momentum, carry trade, and skewness strategies, as well as ways to bring more benefits to investors.

What Drives Currency Market Returns?: A Present-Value Approach

This paper motivates a novel predictor of currency returns and exchange rate changes, the lagged foreign interest rate. This variable is the dividend-to-price analogue in currency markets and its forecasting ability is incremental to established predictors. Currency-return predictability is primarily attributable to time-series (versus cross-sectional) variation in the foreign interest rate. Then, forward premium regressions that exploit exchange rate predictability consistently generate positive slopes for both individual counties and the aggregate. From a U.S. investor's perspective, currency strategies that condition on the lagged foreign interest rate deliver significant alphas and outperform the dollar carry-trade strategy.