US DOLLAR - FOREIGN EXCHANGE TEAM, April 27, 2017
Our current trading signal for the US dollar index is BUY. We use a quantitative model to develop investing decisions for the currency basket index. Our algorithm exploits the relationship between the dollar and key macro factors including monetary policies and balance sheet of the Fed relative to other major central banks, nominal and real interest rate spreads, inflation differentials, forward breakeven inflations, trade and current account balances, global foreign exchange reserves, effective exchange rates, yield curve and butterflies, private and public debt levels, fiscal deficits, consumer and business confidence, employment and payroll levels, orders, sales, inventories, manufacturing and non-manufacturing surveys, private and public spending, personal income, corporate earnings, credit growth, lending conditions, foreign investment flows, inter-bank liquidity, volatility skews, implied and realized volatility, sovereign and credit spreads, and levels of financial speculations. These drivers are essential in determining the principal force behind the outlook of the greenback. One reason why our algorithm requires many different types of drivers lies in the fact that the US dollar is largely influenced by the direction and maturity of multiple secular trends. Our mathematical system is developed to isolate periods when the dollar historically turned in a nice profit, but with little in the form of downside risk.
Based on a scale from 0 to 100, with 100 being the most bullish and 0 being the most bearish, our latest model reading for the US dollar is 72.65. The average return of the trades is 7.15% and the annualized return of the trades is 9.07%. Measuring the risk-adjusted performance, the model has produced a Sharpe Ratio of 1.17, which is driven by the model's standard deviation of 7.77%. For comparison purpose, the Sharpe Ratio of the buy and hold strategy for the US dollar is 0.27. The Sortino Ratio, which measures the relative returns of the model over its downside deviation of 3.10%, is at 1.55. The Calmar Ratio, which is the ratio of the average return over the maximum drawdown, is at 1.31. The calculation of the model for the US dollar took 1.78 hours per CPU core to complete at our central computation workstations, which are a group of powerful computers that perform statistical computation continuously 24 hours day and 7 days a week to produce real-time trading signals for the US dollar.
Our model indicates that the market supply/demand situation is now asymmetric, and we would expect the level of the US dollar to rise. Consequently, we believe that the current stage is a time when the US dollar can be added to the portfolio. The table below shows selected drivers that have significant recent updates. They are among the large macro database on which we perform statistical analysis to project future price trends and develop investment views. We do not rely only on any single factor to model our investments. Instead, the cross relationships of all the factors and time series are researched back over many market cycles in both periods of secular bullish and bearish trends. The goal of our algorithm is to identify profitable buy and sell opportunities and optimize the risk/return profile for the US dollar.
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