Currency Trading

What are the implications of mainstream economics for bitcoin? In his March 2024 paper entitled “Bitcoin: What Does Mainstream Economics Have to Say?”, Joshua Hendrickson tackles the following questions:

1. Why does money exist and what role does it play in society? How does bitcoin fit our understanding of this role?
2. What is bitcoin worth?
3. Is bitcoin (or can bitcoin be) a sound form of money?
4. Should governments adopt bitcoin?

His goal is to decipher how economics (not any particular economist) answer these questions. Applying mainstream economic theory, he concludes that: Keep Reading

How do different asset classes interact with euro-U.S. dollar exchange rate? To investigate, we consider relationships between Invesco CurrencyShares Euro Currency (FXE) and the exchange-traded fund (ETF) asset class proxies used in the Simple Asset Class ETF Momentum Strategy (SACEMS) or the Simple Asset Class ETF Value Strategy (SACEVS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for FXE and the asset class proxies since February 2006 as available through August 2023, we find that: Keep Reading

How do different asset classes interact with U.S. dollar valuation? To investigate, we consider relationships between Invesco DB US Dollar Index Bullish Fund (UUP) and the exchange-traded fund (ETF) asset class proxies used in the Simple Asset Class ETF Momentum Strategy (SACEMS) or the Simple Asset Class ETF Value Strategy (SACEVS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for UUP and the asset class proxies since March 2007 as available through August 2023, we find that: Keep Reading

A subscriber asked whether currency exchange rates exhibit reliable seasonality that may be used to time equities (with a stronger currency implying lower asset prices). To investigate, we look for reliable calendar month effects for the U.S. dollar (USD)-euro exchange rate and for Invesco DB US Dollar Index Bullish Fund (UUP). We further look at how monthly returns for these variables relate to those for SPDR S&P 500 ETF Trust (SPY) as a proxy for the U.S. stock market. Using monthly data for the USD-euro exchange rate since January 1999 and for UUP since March 2007, and corresponding data for SPY, all through November 2022, we find that: Keep Reading

Do formal asset allocation methods specify a portfolio allocation to bitcoin (BTC)? In his September 2022 paper entitled “Optimal Allocation to Cryptocurrencies in Diversified Portfolios”, Artur Sepp applies four quantitative methods to estimate optimal allocations to bitcoin within systematically rebalanced portfolios. He considers: two risk-only methods based on either equal risk contribution or maximum diversification; and, two risk-return methods based on either maximum Sharpe ratio or maximum constant absolute risk aversion utility. For each method, he develops allocations for four portfolios:

1. 100% alternatives without BTC (consisting of HFRX Global Hedge Fund Index, SG Macro Trading Index, SG CTA Index and GLD).
2. 100% alternatives with BTC.
3. 75%/25% conventional assets/alternatives without BTC, with 75% allocation to the 60/40 stocks/bonds iShares Core Growth ETF (AOR) fund and 25% allocation to non-BTC alternatives.
4. 75%/25% conventional assets/alternatives with BTC.

He rebalances each portfolio quarterly employing the most recent five years of monthly return inputs to calculate allocations. Since the BTC series starts in July 2010, initial allocation estimates are for June 2015. Using monthly return data for all assets during July 2010 through August 2022, he finds that:

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Do exchange-traded funds (ETF) that track major currencies support a relative momentum strategy? To investigate, we consider the following four ETFs:

Invesco DB US Dollar Bullish (UUP)
Invesco CurrencyShares Euro Currency (FXE)
Invesco CurrencyShares Japanese Yen (FXY)
WisdomTree Chinese Yuan Strategy (CYB)

We each month rank these ETFs based on past return over lookback intervals ranging from one to 12 months. We consider portfolios of past winners reformed monthly based on Top 1 and on equal-weighted (EW) Top 2 and Top 3 ETFs. The benchmark portfolio is the equally weighted combination of all four ETFs. We present findings in formats similar to those used for the Simple Asset Class ETF Momentum Strategy and the Simple Asset Class ETF Value Strategy. Using monthly adjusted closing prices for the currency ETFs during March 2007 (when three become available) through August 2022, we find that: Keep Reading

A subscriber asked whether a rapid, large (20% or more) individual country currency devaluation versus the U.S. dollar indicates that the country’s stock market will rise the next quarter (with country exports presumably more competitive post-devaluation). To investigate, we select five currency exchange rates versus the U.S. dollar and relate monthly and quarterly changes in these rates to next-month and next-quarter total returns in U.S. dollars on exchange-traded funds (ETF) for respective country stock markets, as follows:

1. Malaysia: Ringgit to U.S. Dollar and iShares MSCI Malaysia ETF (EWM).
2. South Korea: Won to U.S. Dollar and iShares MSCI South Korea ETF (EWY).
3. Brazil: Real to U.S. Dollar and iShares MSCI Brazil ETF (EWZ).
4. China: Yuan Renminbi to U.S. Dollar and SPDR S&P China ETF (GXC).
5. India: Rupee to U.S. Dollar and iShares India 50 ETF (INDY).

We consider both linear relationships and outlier relationships (> 20% devaluations). Using monthly and quarterly changes/dividend-adjusted returns for the selected currency/equity ETF pairs as available (all limited by ETF histories) through June 2022, we find that: Keep Reading

A subscriber asked whether the Turn-of-the-Month (TOTM) effect applies to currencies. To investigate, as in the past, we define TOTM as the interval from the close five trading days before to the close four trading days after the last trading day of the month (a total of eight trading days, centered on the monthly close). We measure TOTM returns for the following four exchange-traded funds (ETF):

Invesco DB US Dollar Bullish (UUP)
Invesco CurrencyShares Euro Currency (FXE)
Invesco CurrencyShares Japanese Yen (FXY)
WisdomTree Chinese Yuan Strategy (CYB)

Using daily dividend-adjusted prices for these ETFs from their respective inceptions through mid-June 2022, we find that: Keep Reading

What information is key to investing in crypto-assets? In their May 2022 paper entitled “An Investor’s Guide to Crypto”, Campbell Harvey, Tarek Abou Zeid, Teun Draaisma, Martin Luk, Henry Neville, Andre Rzym and Otto Van Hemert offer insights for investors seeking exposure to crypto-assets. They discuss a variety of tokens, highlighting their functionality and investment properties. They critically compare popular crypto-asset valuation methods. They contrast buy-and-hold investing with volatility-managed and trend-following strategies. They focus on return data starting 2017 as representative of the future, using some intraday data to boost statistical power. They describe custody and regulatory considerations for institutional investors. Using crypto-asset and contemporaneous conventional asset data as available (as early as 2010) through April 2022, they find that:

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A subscriber asked whether the U.S. dollar is a safe haven from the U.S. stock market. One way to address the question is to repeat the tests used in “Best Safe Haven ETF?” on Invesco DB US Dollar Index Bullish Fund (UUP). Specifically, we look at:

1. Contemporaneous UUP return correlation with the S&P 500 Index during all market conditions at daily and monthly frequencies.
2. UUP performance during S&P 500 Index bear markets as defined by the index being below its 10-month simple moving average (SMA10) at the end of the prior month.
3. UUP performance during S&P 500 Index bear markets as defined by the index being -20%, -15% or -10% below its most recent peak at the end of the prior month.

Using daily and monthly dividend-adjusted closing prices for UUP since inception in March 2007 and contemporaneous daily and monthly levels of the S&P 500 Index since June 2006, all through April 2022, we find that: Keep Reading