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: In the US NFIB small business optimism came in weaker than expected, suggesting that the US slowdown is ongoing. In Japan, economy watchers survey data came out weaker than expected. The US continues to have slower momentum than the rest of the world.
Global Policy: In the US, Raphael Bostic signaled to markets that he is prepared to consider a 50 basis point hike to the Fed Funds Rate in March. In the EU, Governor Villeroy told media that he thought market reactions to recently hawkish rhetoric from the ECB were overdone; we think he may be right. Globally, central banks continue to balk at inflation, and we will see how the Fed reacts to the CPI print on Thursday.
Global Market Trends: Commodities have slowed their roll over the last two trading sessions. Looking at markets, our current thought on commodity strength (and inflation) is, “how much is too much?”. We think that Oil prices at their current levels pose a threat to economic growth globally, as they begin to eat into profitability and disincentivize spending. This pressure will soon begin to tell on markets (more so than it already has).
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:
Economic Data Monitor: Today’s Data
Under the surface of our Global Economic Momentum Indicators, we track each and every piece of data that impacts Economic Momentum. We highlight the most recent data for today below. We also show its surprise score, rates from -100 (surprise) to 100 (disappointment):
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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