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Algoam Currency Management Strategies

May 04, 2015

Currencies are the most liquid markets in the world and often can be very volatile. The daily price movements can often exceed the interest rate differentials. With divergent monetary polices in the major economic blocks, currency volatility may rise. It is generally assumed that rising rates cause currencies to appreciate. There is no sustainable correlation between rising rates and rising currency values. Economic factors contribute a lot more to long term currency value developments.

A great deal of progress has been made in understanding currency movements. Our understanding of the FX Carry Trade and how one can benefit from it and the risks it poses is better now because we’ve been monitoring FX Carry models for the last 10 years, both for high yield and G-10 currencies. The key lesson we have learnt is that currency and rate risks have to be managed.

We also have a better understanding of QE and how that impacts currency values.

On a short term basis the most important drivers of currency are technical factors.

Our models can show that momentum, volatility, mean reversion, movement in interest rates and economic data influences market direction. The influence of economic factors is more difficult to capture in trading models on a short term basis.

Our experience is that currencies are just as important as equities, bonds, precious metals and other alternative asset classes for capturing risk premium. Given that currencies impact corporate earnings, the ability of companies to service their debt, the competitiveness of economies, managing currency risks is vital.

The importance of currencies as an asset class is long overdue.

Please have a look at our take on the currency markets: Algoam Currency Management Strategies