Enhancing Currency Risk Premia with RavenPack FX Sentiment Factors

Currency markets tend to follow trends and revert to averages. Analyzing news sentiment for G7 currencies can predict these movements better than traditional methods, leading to more profitable strategies. RavenPack recently introduced FX Sentiment Factors that offer a novel approach to enhance risk-premia strategies (Carry, Value, Momentum) in G7 currency markets.

These factors incorporate sentiment analysis from news sources, capturing both long-term macroeconomic trends (FX Trend-Following) and short-term media attention (FX Mean-Reverting) for each currency. The factors are further equipped with adjustable turnover control mechanisms, which allow for tailored portfolio management.

Superior Returns with Sentiment

Our recent study demonstrates that combining these factors with traditional risk premia strategies leads to superior risk-adjusted returns. In particular we observed that:

• Enhanced Performance with Combined Sentiment Factors: Combining the slow-moving FX Trend-Following factor with the fast-moving FX Mean-Reverting factor leads to superior risk-adjusted returns across all risk premia strategies. The tilted Multi-Factor strategy, which incorporates both factors, achieves information ratios up to 0.67, exceeding the individual tilts of FX Trend-Following (0.60) and FX Mean-Reverting (0.50). Additionally, this combination boosts annualized returns of the benchmark risk premia by up to 106 basis points (bps) for holding periods of 2-3 weeks.

• Robustness Across Timeframes: The FX Trend-Following factor significantly enhances benchmark portfolios, with returns increasing by 255bps in the first half of the sample and 38bps in the second half. The FX Mean-Reverting factor also contributes to improved performance, with return increases of up to 50bps and 118bps in the corresponding periods. Notably, the Combined FX Factor delivers the most significant gains, boosting returns by up to 219bps in the first half and 101bps in the second half.

Download the white paper for a detailed breakdown of how these factors work together to provide valuable insights for your FX trading decisions.