Welcome to the FXDD Research: On the Daily newsletter. This publication provides readers with a sliver of our research process to help contextualize daily economic and market developments across the globe. We designed FXDD’s research process to be intuitive and actionable; therefore, you can expect regular call-outs on risk-reward scenarios we think are lucrative. We typically follow global macro markets, particularly the US, UK, EU, Japan, China, alongside the aggregate World economy. We also follow global assets, i.e., stocks, currencies, commodities, and fixed income (though to a lesser extent). We quantitatively do all this; therefore, you can expect most of our analysis to be standardized, consistent, and repeatable.
Before we dive into our trading signals, here are the latest developments in global macro:
Global Economic Momentum: Today was yet another light day for global economic data; however, tomorrow we will receive a slew of economic data from the US. Namely, we will get CPI, Jobless Claims, and Average Hourly Earnings. CPI data in the US is highly anticipated and is likely to be highly traded.
Global Policy: Pressure continues to build on the ECB to clarify its stance, with governing council members now all publicly discussing the possibility of an interest rate hike this year. For our part, we expect global economic pressures to abate significantly by the time the ECB has the time to consider a hike of its benchmark rates. However, the argument could be made that an interest rate hike is just what the European financial system needs to revive itself. Negative real rates crush private banking systems.
Global Market Trends: Gold continues to creep its way up, which we are keeping a careful eye on. If gold continues to strengthen, while global stock market volatility stays high, we think it will mean that markets are beginning to price the global economic slowdown further. In other news, stock markets bounced today, along with commodities, and the dollar sold off, in a classic risk-on move. However, stock markets have been fighting an uphill battle this year, and if gold continues to strengthen, we think this will continue.
Now, for those looking for more detail, let us look at the underlying models.
Global Economic Momentum: Daily
We start by tracking economic data relative to consensus expectations, as the impact of financial data on markets depends on whether its surprises the upside or downside. We standardize this data and call this indicator Economic Momentum, i.e., higher values are positive and lower values are negative. The color-coding in the table represents higher/more downward momentum for a given country:
Market Trend Monitor: INFLATION
The table below shows the current market probability of the global economy experiencing expansion, inflation, deflation, or stagflation. The two charts show the odds implied by markets that economic growth is rising or falling, or inflation is rising or falling. Finally, the heatmap shows the contributions of major investment markets to these signals. There are three levels for our market probability estimates (monthly, quarterly, and yearly). We typically take the most signal from the yearly gauge and associate more informational value to higher frequency measures.
Currency Bloc Monitor: Dollar Composite
We proxy global capital flows using our Currency Bloc Monitor. The Currency Bloc Monitor aggregates FX price data from currencies that share high correlation characteristics, allowing us the gauge which area or asset in the global economy is attracting cross-border capital. The color-coding in the table reflects the strength of a Currency Bloc versus others for a given time frame. We aggregate these currencies versus the dollar and show our Dollar Composite below:
Quantitative Portfolio
We can construct a rules-based, quantitative model portfolio using our various models to detect price trends. This portfolio uses estimates of price trends, volatility, implied volatility, and macroeconomic drivers to allocate to different assets. Below, we show its most recent allocations:
FX Signal Ranks: Top 10 Signals
In addition to providing our Quantitative Model Portfolio, we also provide our top 10 FX signals for the day, which our model selects from on a weekly basis. The rankings below reflect the strength of the signal:
We look forward to sharing our extensive library of content with you over the months to come. If you enjoyed these materials, feel free to share this with friends or colleagues, and don’t forget to subscribe for more!
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