Mar

24

I'm starting to look for systematic ways to play currencies. The most apparent one is the carry trade based on relative interest rates. I'm also going to look at relative real interest rates, relative gdp, income, balance of payments, and money supply.

First pass: literature suggests carry trade is volatility dependent. Looking at PowerShares DB G10 Currency Harvest fund (DBV) which buys the 3 highest yielding currencies in g10 and shorts the 3 weakest, is down 6% since inception on 9/18/06. Indicator: compute 21-day standard deviation of close-close[1] changes and then rank today's reading over the last 90-days.

Buy DBV when the indicator is in the bottom 1/3 of the range and sell when it exits the bottom 1/3 (vol is low)

Total Return 32%
Avg 1.1%
Count 29
Std 3.0%
t 2.0

Sell short when the indicator is in the top 1/3 of the range and buy to cover when it exits the top 1/3 (vol is high)

Total Return 21%
Avg 1.2%
Count 17
Std 6.2%
t 0.8

Seems to work symmetrically although this crude strategy appears better at capturing the positive risk premia of the carry trade.


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